The ResMed Inc (ASX:RMD) share price could receive an additional boost after US President Donald Trump invoked the Defence Production Act.
What is the Defence Production Act and how will it impact ResMed?
The Defence Production Act is a statute from the Korean War-era that requires certain American companies to suspend their normal production and produce goods that are in short supply and needed in a time of crisis.
In response to the coronavirus breakout, US President Donald Trump invoked the Defence Protection Act on Thursday. The Act will compel and aid companies to build ventilators for coronavirus patients.
ResMed was one of the 6 companies named to help facilitate the production and supply of ventilators as the US faces a shortage of machines. Health experts estimate that the US will need tens of thousands of additional ventilators and the order will remove any supply chain obstacles.
How has ResMed responded to the pandemic?
ResMed is a global leader in respiratory medical devices, particularly targeted towards the treatment of sleep apnoea. In addition, the company also produces invasive and non-invasive ventilators that are used to boost the oxygen intake of patients.
The company recently received an order from the Australian Government for 1,000 invasive ventilators and is aiming to triple production of regular ventilators and increase the production of face masks tenfold. In response to the increased demand, ResMed has modified its manufacturing plant and sleep apnoea production lines in order to meet the demand for ventilators and face masks.
Should you buy?
Prior to the Defence Production Act, ResMed has signalled that the company had seen a substantial jump in demand for ventilators, especially in South Korea and China. The ResMed share price has been in a steady uptrend over the long-term and remains more than 9% below its all-time highs.
Despite the increased demand it should be noted that ResMed’s ventilators currently contribute 10% of the company’s group sales, so investors could be pricing in the impact of a decline in sleep-apnoea devices in the long term.
Nevertheless, in my opinion the ResMed share price should definitely be on the watchlist for long-term investors. It would also be a good idea to keep an eye on the share price of Fisher & Paykel Healthcare Corp Ltd (ASX: FPH), which also produces ventilators. Once market volatility subsides, it will be relatively strong stocks like ResMed and Fisher and Paykel that could potentially be the next market leaders.
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Motley Fool contributor Nikhil Gangaram has no position in any of the stocks mentioned. The Motley Fool Australia has recommended ResMed Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.