Why the ResMed (ASX:RMD) share price slumped even as profit jumped

A 14% increase in quarterly revenue wasn’t enough to save the ResMed share price from profit takers.

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The Resmed CDI (ASX: RMD) tumbled even as management unveiled a double-digit increase in quarterly revenue and a bigger dividend.

But that wasn’t enough to save the sleep-treatment device maker. The ResMed share price crashed by over 3% to $36.06 in early trade.

ResMed share price is worst performer

This makes it the worst performer on the S&P/ASX 200 Index (Index:^AXJO) at the time of writing.

That’s even worse than ASX gold miners, which dominated the rest of the bottom ranks due to the weak gold price.

The Perseus Mining Limited (ASX: PRU) share price, Ramelius Resources Limited (ASX: RMS) and Northern Star Resources Ltd (ASX: NST) are right behind ResMed.

Profit and dividend growth

ResMed posted a 14% uplift in fourth quarter revenue compared to the same time last year to US$876.1 million.

This means its FY21 full year revenue will be 8% ahead of the previous year at US$3.2 billion.

The medtech giant also upped its quarterly dividend by 8% to US42 cents a share. Not that this matters much as investors don’t buy the ResMed share price for its dividends.

Good news overshadowed by margin squeeze

But the news hasn’t gone down well with investors as ResMed’s margins are under pressure. Its non-GAAP gross margin fell 260 basis points (bps) to 57.3%. This dragged its full year margin down 70 bps to 59.1%.

ResMed said this is mainly due to an unfavourable product mix. Sales of lower-margin Sleep devices contributed more to group revenue this time round.

Further, lower average selling prices and foreign currency movements also weighed on margins. However, the foreign exchange “drag” bolstered ResMed’s top line. So, I can only surmise that currency movements didn’t have as big an impact on margins than the first two factors.

Profit takers hit the ResMed share price

Another reason why the ResMed share price came under pressure may have something to do with its 41% surge over the past year.

Shareholders sitting on strong returns would be looking for any excuse to lock in some profits. A margin squeeze is as good as any.

The fact that ResMed didn’t offer much in the way of an outlook also made the profit-taking decision that much easier.

Outlook failed to inspire

“Looking ahead, we are confident in our ability to grow steadily through our fiscal year 2022 and to deliver for all our stakeholders,” said ResMed’s chief executive, Mick Farrell.

“We’re driving accelerated adoption of digital health solutions in sleep apnea, COPD, and out-of-hospital care, accelerating our ResMed 2025 strategy.”

After a big run-up in the shares, investors will need more than assurances of steady growth to keep pushing ResMed higher – at least for now.

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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