3 reasons ResMed shares 'are just too cheap!'

This stock could still produce healthy gains, according to one fund manager.

| More on:
ventilator mask

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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".

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended ResMed. The Motley Fool Australia has positions in and has recommended ResMed. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Healthcare Shares

Male doctor in a lab coat working at laptop looking serious.
Share Fallers

Why this ASX 200 healthcare stock is tumbling 6% today

Inflation pressures are claiming another victim as this healthcare giant lowers its FY24 expectations.

Read more »

Research, collaboration and doctors working digital tablet, analysis and discussion of innovation cancer treatment. Healthcare, teamwork and planning by experts sharing idea and strategy for surgery.
Healthcare Shares

Buy, hold or sell these 3 ASX 200 healthcare shares: Experts

These experts reveal their calls on CSL, Resmed and Sonic Healthcare shares today.

Read more »

Doctor doing a telemedicine using laptop at a medical clinic
Share Gainers

Guess which ASX healthcare stock just exploded 63% on Federal budget funding news!

Investors are bidding up the ASX healthcare stock amid extra funding in the Federal budget.

Read more »

two doctors smile as they sit together at a desk looking at a patient's Xray.
Healthcare Shares

This ASX 200 healthcare stock just hit an all-time high: Is it too late to buy?

The valuation of this high-performer has soared.

Read more »

A smiling woman sits in a cafe reading a story on her phone about Rio Tinto and drinking a coffee with a laptop open in front of her.
Healthcare Shares

1 magnificent ASX stock down 10% to buy and hold forever

Analysts say this high-quality stock is a great option for investors right now.

Read more »

Doctor doing a telemedicine using laptop at a medical clinic
Healthcare Shares

2 ASX healthcare shares rocking higher on big news

This 'spray-on skin' company and cancer-fighting biotech have exciting news for shareholders today.

Read more »

Scientists working in the laboratory and examining results.
Healthcare Shares

Insider still buying Mesoblast shares despite 230% rise this year: Should you buy?

This high-flying share is still reporting insider buying. Should you buy too?

Read more »

A woman reclines in a comfortable chair while she donates blood holding a pumping toy in one hand and giving the thumbs up in the other as she is attached to a medical machine to collect her blood donation.
Healthcare Shares

Buy CSL shares for growing dividends and 'compelling long-term tailwinds'

CSL has increased both its interim and final dividend every year since 2021.

Read more »