The Resmed CDI (ASX: RMD) share price has risen 46% over the last six months, and a fund manager reckons there are more gains to come.
This ASX healthcare share has been through a lot in the past year as investors worried about the effects of weight loss drugs on its business, as we can see on the chart below.
The latest financial updates have shown the company continues to deliver a strong, profitable performance. The FY24 third-quarter earnings before interest and tax (EBIT) beat market consensus estimates by 7%, and management was feeling confident about the outlook in the conference call, according to fund manager Firetrail.
Firetrail said there has been "significant noise" about ResMed shares because of a GLP-1 drug trial being conducted on sleep apnea patients.
The fund manager is still bullish about the company for a few different reasons. I'll run through each of them below, leading Firetrail to say that Resmed shares are "just too cheap!".
Manageable impacts from weight loss drugs
Firetrail said its view has been that increased awareness of CPAP (continuous positive airway pressure) therapy will "largely offset the negative impact of patient drop-out due to weight loss".
With its FY24 third-quarter update, Resmed updated its findings from the dataset of 660,000 patients with a sleep apnea diagnosis who have taken a GLP-1 drug in the past two and a half years.
Firetrail commented:
While not proving causation, only correlation, this data shows that GLP-1 users are 10.5% more likely to start CPAP therapy and have mask resupply rates 3-5% better than non-GLP-1 patients with sleep apnoea.
Revenue growth
The fund manager said competitor Philips' consent decree "looks likely to keep it out of the US CPAP device market for a number of years."
Firetrail pointed out that Resmed recently reported record device sales in what is its seasonally weakest quarter. In the FY24 third quarter, the business generated revenue growth of 7%, taking the revenue to $1.2 billion.
The fund manager suggests the business is growing its market share amid these record sales.
Gross profit margin
The third positive area that Firetrail discussed for Resmed shares was the gross profit margin. Firetrail said the weaker gross profit margin was due to fight and manufacturing cost pressures, but these effects are only transitory.
Resmed's FY24 third-quarter update showed a 160 basis point (1.60%) expansion for the gross profit margin.
Pleasingly, the Resmed gross margin is now "almost back to pre-COVID levels".
