Is the ResMed (ASX:RMD) share price in the buy zone?

Can the ResMed share price keep rising?

| More on:
Woman in mustard yellow blouse on laptop holds both hands out to either side with graphic illustration of question marks above them

Image source: Getty Images

The ResMed Inc (ASX: RMD) share price has been a strong performer in 2021.

Since the start of the year, the sleep treatment focused medical device company’s shares have risen a sizeable 45% to $39.76.

This is more than four times greater than the return of the S&P/ASX 200 Index (ASX: XJO) over the same period.

Where next for the ResMed share price?

Unfortunately, one leading broker believes the ResMed share price may now have peaked for the time being.

According to a note out of Goldman Sachs, it has retained its neutral rating and $36.20 price target.

Based on the current ResMed share price, this implies potential downside of 9% over the next 12 months.

What did the broker say?

The broker notes that ResMed has just held its annual investor day event.

And while the company spoke positively and reiterated its expectation of a US$300 million to US$350 million revenue tailwind from a competitor product recall, it isn’t enough for a more positive rating. This is largely due to the current valuation of the ResMed share price.

Goldman explained: “Our primary challenge with the stock at these levels is valuation. Clearly, RMD has a substantial opportunity to capture sustainable share from a material product recall, but we believe the earnings upside may not justify US$15bn (A$20bn) of additional market capitalisation since mid-May (43x-50x the guided FY22 revenue tailwind).”

The broker is forecasting solid sales and earnings growth through to FY 2026. However, the level of growth it is forecasting is simply not enough to justify the higher than normal multiples its shares trade on.

It said: “We forecast normalised sales/earnings CAGRs of +7%/+8% respectively (FY23-26E), modestly below recent historical run-rates, and yet valuation of 33.1x NTM EV/EBITDA is now a substantial sector premium and +57% vs. history. We remain Neutral-rated.”

Should you invest $1,000 in ResMed right now?

Before you consider ResMed, you'll want to hear this.

Motley Fool Investing expert Scott Phillips just revealed what he believes are the 5 best stocks for investors to buy right now... and ResMed wasn't one of them.

The online investing service he’s run for nearly a decade, Motley Fool Share Advisor, has provided thousands of paying members with stock picks that have doubled, tripled or even more.* And right now, Scott thinks there are 5 stocks that are better buys.

*Returns as of August 16th 2021

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.

More on Broker Notes