ResMed (ASX:RMD) share price tumbles on broker downgrade

This leading broker believes the ResMed share price has peaked…

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The ResMed Inc (ASX: RMD) share price is out of form on Tuesday.

In afternoon trade, the sleep treatment focused medical device company’s shares are down 2.5% to $31.82.

Despite this decline, the ResMed share price is still up over 17% since the start of the month.

Why is the ResMed share price dropping?

Today’s decline appears to have been driven by a combination of broad market weakness and a broker note out of Citi.

In respect to the latter, this morning analysts at Citi downgraded the company’s shares to a neutral rating with an improved price target of $32.50.

This was broadly in line with the ResMed share price prior to today’s decline.

Why did Citi downgrade its shares?

According to the note, the broker made the move on valuation grounds after a strong gain by the ResMed share price this month.

It notes that this has been driven by news that rival Philips has recalled its DreamStation CPAP devices. And while the broker has upgraded its earnings estimates to reflect its belief that this development could be a short term boost to ResMed’s sales, it feels this is now reflected in its shares.

Citi commented: “The recall of Philips’ DreamStation CPAP devices creates an opportunity for RMD to fill the void in the short term and potentially make long-term market share gains. Philips is unlikely to be able to supply new patients until Jan 2022 as it ramps up production of its DreamStation 2 – new patients account for ~80% of Philips’ CPAP devices sales.”

“We upgrade FY22-23e EPS by 5%/10%, increase our TP to $32.50 (from $28.50) but downgrade to Neutral as the share price now reflects our base-case scenario. We assume RMD can increase its CPAP devices and masks manufacturing capacity by 20% and that Philips won’t re-enter the new patient market for 12 months – these two variables are the main unknowns. RMD has not made any comments on the situation and will report FY21 in August,” it concluded.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has recommended ResMed. The Motley Fool Australia has recommended ResMed Inc. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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