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Momentum

ResMed Inc. (RMD - Analyst Report) reached its all-time high of $42.92 on December 12, riding on growing demand for sleep therapy products worldwide and a robust fiscal first-quarter performance. These solid results boosted all 8 estimates for fiscal 2013 over the past 60 days. Consequently, the stock attained a Zacks #1 Rank (Strong Buy) on December 18.

This leading medical equipment developer appears to be a solid momentum pick, given positive earnings surprises for 4 consecutive quarters, a healthy portfolio and a year-to-date return of 68.5%.

Excellent Quarter

On October 25, ResMed reported strong fiscal first-quarter earnings per share of 49 cents, beating the Zacks Consensus Estimate by 7% and the year-ago earnings by 48%. Revenues increased 8% year over year (up 12% at constant exchange rates or CER) to $339.7 million, almost in line with the Zacks Consensus Estimate. This represented the company’s 71st successive quarter of revenue growth.

The increase in revenues was primarily due to a favorable product mix and a vastly under-penetrated and growing sleep-disorder breathing (SDB) market. This led to an increase in unit sales for the company’s flow generators, masks and accessories with balanced growth across geographies.

ResMed is optimistic about its performance in the emerging markets like India and China along with a developed market like Japan. Though Japan already accounts for half of the company’s Asia-Pacific sales, ResMed believes that it has further room for expansion going forward. The company is hopeful about the recent increase in reimbursement in this region, which is expected to bolster its sales performance in the near term. Also, it expects Germany and the U.K. to emerge as its key markets on the back of restructuring efforts in these countries.

Earnings Estimates Moving Up

The Zacks Consensus Estimate for fiscal 2013 has increased 5.4% over the past 60 days to $2.16 per share, as all 8 estimates were revised upward. This represents year-over-year growth of about 23.9%. Meanwhile, the Zacks Consensus Estimate for 2014 is up 3.9% to $2.36 over the same time frame on the back of positive revisions from 6 of 7 estimates. This indicates estimated growth of about 9.65%, year over year.

Valuation

ResMed’s valuation looks stretched compared to its peers by most metrics. The company is currently trading at a forward P/E of 19.85x, which is almost a 2.5% premium to the peer group average of 19.37x. The price-to-book ratio of 3.58x is also substantially higher than the peer group average of 2.08x. The premium ratios are warranted given its higher long-term earnings growth rate of 17.9%, compared with the peer group average of 11.7%. However, the price-to-free-cash-flow ratio looks attractive at 19.29x, a roughly 13.8% discount to the peer group average of 22.37x.

Also, shares look pretty impressive with a return on investment (ROI) of 15.0%, substantially higher than the peer group average of 8.1%. This implies that the company makes business investments more efficiently than its peer group. Also, with respect to return on assets (ROA), ResMed looks attractive at 13.7%, a lofty premium compared to the peer group average of 6.7%.

ResMed Inc. engages in the development, manufacture, and distribution of medical equipment for treating, diagnosing, and managing sleep-disordered breathing and other respiratory disorders. It offers various products for the treatment of obstructive sleep apnea and other respiratory disorders, including airflow generators, mask systems, diagnostic products, headgear, ventilation devices, and other accessories. The company has a market capitalization of $6.12 billion.

Other Zacks #1 Rank (Strong Buy) medical device stocks include Myriad Genetics (MYGN) and Omnicell Inc. (OMCL).


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