Broker upgrade sends ResMed (ASX:RMD) share price charging higher

ResMed’s shares are on form today. Here’s why…

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Key points

  • ResMed shares have been upgraded by Goldman Sachs
  • Broker wasn’t blown away by its second quarter update
  • Analysts see enough long term potential to make it a buy

The ResMed Inc (ASX: RMD) share price is charging higher on Monday.

In morning trade, the sleep treatment focused medical device company’s shares are up 3% to $32.17.

Why is the ResMed share price charging higher?

Investors have been bidding the ResMed share price higher today following the release of a bullish broker note.

According to a note out of Goldman Sachs, its analysts have upgraded the company’s shares to a buy rating with a slightly trimmed price target of $35.80.

Based on the current ResMed share price, this implies potential upside of 11% for investors over the next 12 months.

Why is Goldman bullish on ResMed?

Goldman notes that ResMed’s second quarter update was a bit of a disappointment. Not only did its revenue and earnings fall a touch short of the broker’s estimates, Goldman’s concerns about the impact of supply shortages on the company’s ability to capitalise on a competitor recall were only heightened.

Goldman said: “The 2Q22 update did little to ease our concerns that supply shortages will materially restrict the near-term upside from competitor challenges. The recall tailwind of $45-55m in 2Q represented a sharp sequential slowdown from $80-90m in 1Q, and we now forecast the FY22 benefit at $285m, below the guided range of $300-350m.”

Nevertheless, the broker notes that the ResMed share price has pulled back recently to a more attractive level. This, combined with its bullish view on the company’s long term prospects, warranted an upgrade to buy.

The broker explained: “RMD is the clear leader in an attractive market with long-term, realizable penetration upside (underpinning a high-single digit organic profile). Competitive positioning has consistently strengthened over the last decade and looks set to continue to do so. The pricing profile is the most supportive in years, and whilst the ongoing supply/distribution headwinds add cost and complexity to near-term performance, these pressures should progressively ease through the coming quarters, and so have created an attractive entry point in the shares, in our view.”

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 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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