Why broker thinks falling ResMed (ASX:RMD) share price is a buying opportunity

This broker is expecting a strong year from the sleep disorder treatment devices company.

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Key points:

  • ResMed share price is swept up in the market sell-off but JP Morgan believes 2022 will be a strong year for the company
  • The product recall by rival Philips gives ResMed time and opportunity to build and hold market share
  • JP Morgan upgraded ResMed to “overweight” from “neutral” on the back of this more bullish outlook

The ResMed CDI (ASX: RMD) share price isn’t spared from the market de-rating, but JP Morgan believes 2022 will be a strong year for the company.

The broker’s conviction was strong enough for it to upgrade the ResMed share price to “overweight” from “neutral”.

This news could bring relief to shareholders that have seen the sleep disorder treatment devices company tumble 13% since the start of the year, including a 3.86% fall today.

Why the ResMed share price is copping a de-rating

Market sentiment towards the ResMed share price has recently soured due to interest rate expectations and  COVID-19 supply chain disruptions.

The threat of higher interest rates is knocking the wind out of high price-to-earnings (P/E) shares. This is because the valuations of ASX shares trading at a market premium tend to suffer more when rates increase.

COVID chaos hurting sales

Meanwhile, ResMed’s supply chain problems are hardly unique as well. The difficulty in securing components and delays in shipping are driving up costs for the company.

“Our channel checks indicate ResMed’s deliveries fell short of customer expectations late in the December quarter,” JP Morgan said.

“This reflects both supply chain challenges (a shortage of key components) and the increased freight times as the Christmas rush exacerbated the pandemic-induced challenges.”

Brightening outlook for ResMed

But there are reasons to feel bullish on the ResMed share price despite these headwinds. The broker believes production should ramp up over the coming months as the chip and component shortage eases.

This will allow the company to increase sales of its devices into the end of the financial year and quite possibly into FY23.

Perhaps more significant for ResMed’s fortunes is the product recall by its key competitor, Philips. It seems that the time it will take Philips to rectify this issue will be longer than for ResMed to overcome the supply chain bottleneck. This gives the ASX-listed entity an opportunity to take and hold market share.

What is the ResMed share price worth?

“While Philips has stuck to its 12-month guidance to deal with the recall we expect this will prove optimistic given the supply chain challenges reported by ResMed and others,” said JP Morgan.

“We also note the recall is the largest in medical device history and seems to have attracted a significant level of regulatory scrutiny.”

Also worth noting is that ResMed has started charging a $12 surcharge for all its devices in 2022 to help offset rising costs. The broker estimates that approximately half of the gross margin decline caused by the component and freight cost challenges will be offset by the surcharge.

JP Morgan lifted its 12-month price target on the ResMed share price to $37.90 from $36 a share. That suggests a potential 20% upside on the current share price of $31.40.

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 over 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 January 13th 2022

Motley Fool contributor Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. 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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