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Here's Why You Should Hold on to ResMed (RMD) Stock for Now

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ResMed Inc. (RMD - Free Report) has been gaining on robust sales of its mask product portfolio. The widespread use of the company’s core non-invasive ventilation and life support ventilation solutions for chronic obstructive pulmonary disease (COPD) buoys optimism. Meanwhile, the growing demand for ResMed’s digital health solutions is an added positive. However, contraction in both margins and macroeconomic headwinds do not bode well.

Over the past year, the Zacks Rank #3 (Hold) stock has gained 24% against 5.3% fall of the industry and the 27.3% rise of the S&P 500.

The renowned medical device company has a market capitalization of $38.19 billion. Its earnings per share for the first quarter of fiscal 2022 surpassed the Zacks Consensus Estimate by 11.9%.

Over the past five years, the company’s earnings grew 14.5%, way ahead of the industry’s 7.0% rise and the S&P 500’s 2.8% increase. The company’s long-term expected growth rate of 15.8% for earnings compares with the industry’s long-term growth expectation of 17.6% and the S&P 500’s estimated 11.7% rise.

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Let’s delve deeper.

Factors At Play

Potential in Digital Health: ResMed continues to see increased global demand for its digital health solutions amid the ongoing pandemic. In its earnings call for the first quarter of fiscal 2022, the company noted that it holds 10 billion nights of medical data in the cloud and more than 15.5 million cloud connectable medical devices on bedside tables in 140 countries. This data is expected to benefit patients, providers, physicians, payers and entire health care systems. ResMed has also upgraded the patient engagement tool – myAir. This new myAir 2.0 release supports the next-generation platform called AirSense 11.

Robust Mask Sales: ResMed recorded strong sales across its mask product portfolio in the United States, Canada and Latin-America region in the fiscal first quarter, where growth was 5%. In the combined Europe, Asia and other markets, the uptick was 21% on a reported basis. Globally, masks and other sales increased 8% at CER. Excluding COVID-related sales in the year-ago quarter, global masks and other sales surged 10% at CER, raising optimism.

COVID-19-Led Critical Care Drives Demand: In the fiscal first quarter, ResMed noted that COVID-19 has advanced awareness, adoption and acceptance of digital health and remote care, including home-based sleep apnea tests. We are upbeat about the strong uptake of ResMed’s core non-invasive ventilation and life support ventilation solutions for COPD, particularly in markets outside of the United States. The company also continued to see rapid uptake of the AirView for ventilation software during the quarter, as this software solution largely benefitted physicians amid the pandemic. Further, the pandemic has resulted in a rapid expansion of ResMed’s Telehealth services.

Downsides

Weak Margin Scenario: In the fiscal first quarter, ResMed’s adjusted gross margin contracted 270 basis point (bps) from the year-ago number due to higher manufacturing costs, incremental freight costs and lower average selling prices. Meanwhile, adjusted operating margin contracted 49 bps year over year. The contraction of both margins does not bode well for the company.

Competitive Landscape: ResMed primarily competes with prominent MedTech players and regional manufacturers. The disparity between the company's resources and those of its competitors may increase due to consolidation in the healthcare industry.

Macroeconomic Woes: ResMed continues to be threatened by a host of macroeconomic problems. Pricing pressure in the United States and Europe has been a staggering issue over the past few quarters. ResMed's overseas sales also continue to be hampered by currency fluctuations.

Estimate Trend

Over the past 30 days, the Zacks Consensus Estimate for ResMed’s fiscal 2022 earnings has moved north by 0.9% to $6.26.

The Zacks Consensus Estimate for its second-quarter fiscal 2022 revenues is pegged at $919.97 million, suggesting a 14.99% rise from the year-ago reported number.

Key Picks

A few better-ranked stocks in the broader medical space are Apollo Endosurgery, Inc. (APEN - Free Report) , Cerner Corporation and West Pharmaceutical Services, Inc. (WST - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Apollo Endosurgery has a long-term earnings growth rate of 7%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 25.6%, on average.

Apollo Endosurgery has outperformed its industry over the past year. APEN has gained 130% versus the 9.3% industry growth.

Cerner has a long-term earnings growth rate of 13.3%. The company surpassed earnings estimates in the trailing three quarters and was in line in one, delivering a surprise of 3.2%, on average.

Cerner has outperformed its industry over the past year. CERN has gained 17.6% versus the 39% industry decline.

West Pharmaceutical has a long-term earnings growth rate of 27.6%. The company surpassed earnings estimates in the trailing four quarters, delivering an average surprise of 29.4%.

West Pharmaceutical has outperformed its industry over the past year. WST has rallied 67.3% versus the industry’s 15.7% rise.