The biggest and best of the Australian share market were sinking like stones last Friday as the S&P/ASX 200 Index (ASX: XJ) sank 2.1%. ResMed Inc (ASX: RMD) shares were in the green for part of the crucifying session, managing to escape most of the carnage, yet eventually succumbed to the selling.
With so many share prices slashed, you would think I'd buy one of the more beaten-up companies. Instead, I bagged my third helping of shares in the sleep apnea treatment company despite the share price being up then.
See, Resmed handed out its fourth-quarter results on Friday. From what I could tell, $32.60 per share looked good, even if the share price wasn't getting trampled like the rest of the market — leaving you wondering what's my reasoning behind this belief.
Wonder no more.
Impressive results in tight times
I want to see signs of pricing power from the companies I'm invested in… ResMed's fourth-quarter (and full-year) FY2024 results delivered.
In FY24, the CPAP device seller grew its revenue by 11% to US$4.7 billion. Meanwhile, income from operations jumped 17%. Part of the margin expansion was attributed to "[…] an increase in average selling prices", as stated by ResMed chief financial officer Brett Sandercock. Gross margins increased 90 basis points to 56.7%.
These numbers tell me ResMed continues to wield its brand and unique value proposition to its competitive advantage. That is to say, I believe this company is poised to keep earning an abnormally high return compared to the market average.
Moreover, these solid results were achieved at a time when there was no shortage of challenges. Geopolitical tensions and cost-of-living pressures are two examples, but the elephant in the room is obviously weight-loss drugs, known as GLP-1s.
As it turns out, GLP-1 medications may not be as scary for ResMed investors as many had thought.
GLP-1 boogeyman script flipped
The ResMed share price significantly fell in 2023 as worries grew about GLP-1s consuming the need for continuous positive airway pressure (CPAP) machines. My original investment was based on this notion being incorrect.
Friday's release provided further indication that GLP-1s are not the stake to the heart as feared. In fact, data is proving the opposite, as ResMed CEO Mick Farrell stated:
This analysis demonstrates that GLP-1s are having a positive impact on patients both seeking and adhering to positive airway pressure therapy. The latest numbers are an improvement from what we have presented previously.
For patients prescribed a GLP-1 medication, the latest data show a 10.7 absolute percentage points higher propensity to start PAP therapy over those without a GLP-1 prescription.
Farrell went on to describe weigh-loss drugs as a "clear tailwind for our business, bringing more patients into the health care system".
ResMed shares don't appear expensive
Good results are encouraging, but price still matters when it comes to investing.
I did some quick 'back of the napkin' math on Friday, giving me a long-term price target of around $50 on ResMed shares. So, at $32.60 apiece, I was keen as a bean to buy some more amid the market's mild reaction to the result.
There are many great companies in the healthcare industry, guarded by patents and large market shares. Because of their dominance, these businesses tend to trade on price-to-earnings (P/E) ratio upwards of 40 times earnings. Yet ResMed shares trade on an earnings multiple of around 32 times.
I still think investors are underestimating ResMed's long-term potential. So, yes, I now own more shares in this quality company.
