One of the best performing stocks during the COVID-19 market mayhem may be set to tumble, according to one leading broker.
The RESMED/IDR UNRESTR (ASX: RMD) share price rallied over 12% since the start of the year when the S&P/ASX 200 Index (Index:^AXJO) tanked by more than 21% into a bear market.
The outperformance of ResMed is even more impressive when compared to another sector darling, CSL Limited (ASX: CSL). Shares in the blood products maker "only" gained around 8% over the period, while the Cochlear Limited (ASX: COH) plunged by around 20%.
Time to take profit
RedMed's latest update is giving reasons for investors to bid the stock higher as demand for its ventilators spiked due to the coronavirus pandemic.
This also means that the current quarter should produce another bumper result for the sleep apnoea treatment company.
But now may be the time to take profit on the stock, warned JP Morgan who downgraded its recommendation on ResMed to "underweight", which is equivalent to "sell".
Surge before a fall
"We expect sales of such devices to almost double again in the current quarter offsetting an equally dramatic drop in revenues from the group's core sleep devices," said the broker.
"However, beyond this we expect much weaker economic conditions across the globe to weigh on the recovery especially in the US where individual health spending is more closely correlated with economic conditions."
While there is some defensiveness in ResMed's business, being sales of consumables (i.e. its masks) and recurring software revenues, JP Morgan believes the weaker earnings outlook is yet to be priced into the high-flying stock.
The $100 million target
ResMed reported a $35 million increase in sales of equipment used to treat COVID-19 and tripled production of masks and ventilators. This implies that the company will generate sales of around $100 million in the June quarter.
That's not a number to sneeze (or cough) over!
But a sharp drop in new patients using ResMed to treat their sleep disorder is "inevitable", according to JP Morgan.
"Management reported double-digit declines in diagnosis rates due to the closure of sleep labs and hospital facilities," explained the broker.
"An increase in home sleep tests will likely only provide a modest offset. With new patient setups accounting for ~50% of revenues the impact on earnings will be material."
Not immune from a depression
The looming deep recession that many are predicting will curb demand for sleep treatments. This is particularly so in ResMed's biggest market, the US, where physician visits are forecast to decline materially.
Healthcare stocks are normally more isolated from economic swings, but ResMed may prove to be the exception if JP Morgan's crystal ball is accurate.
The broker's price target on the stock is $21.90 a share.
