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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 increased demand for sleep and respiratory care devices on steady recovery of markets from COVID-19 impact and a competitor’s product recall. 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 19.7% against a 17.5% fall of the industry and 16.9% rise of the S&P 500.

The renowned medical device company has a market capitalization of $34.73 billion. Over the past five years, the company’s earnings grew 14.5%, way ahead of the industry’s 7.0% rise. The company’s long-term expected growth rate of 16.3% for earnings compares with the industry’s long-term growth expectation of 16.9%.

Let’s delve deeper.

Factors at Play

COVID-Led Critical Care Drives Demand for Products: ResMed’s business had received a significant boost amid the pandemic on the back of strong demand for critical care products like ventilators and masks. During the fiscal second quarter, ResMed, noted that COVID-19 has boosted awareness, adoption and acceptance of respiratory health and respiratory hygiene along with digital health and telehealth tools, including home-based sleep apnea tests. Throughout the fiscal second quarter, the company saw strong demand for core non-invasive ventilation and life support ventilation solutions for COPD, particularly in markets outside of the United States.

Potential in Digital Health: Of late, ResMed has been focusing on digital health technology. Amid the pandemic, ResMed saw increased demand for its digital health solutions globally with the robust adoption of remote patient engagement and population health management.

In its earnings call for the fiscal second quarter, ResMed noted that it holds 10.5 billion nights of medical data in the cloud and more than 16 million 100% cloud connectable medical devices on bedside tables in 140 countries, thereby leading the digital health technology market. This data is expected to benefit patients, providers, physicians, payers and entire health care systems.

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Robust Mask Sales: ResMed recorded robust masks and other sales in the United States, Canada and Latin-America region in the fiscal second quarter, where growth was 9% on a reported basis. In combined Europe, Asia and other markets, masks and other sales grew 8% on a reported basis and 11% at CER, benefitting from improved patient flow relative to the prior year. Globally, masks and other sales rose 10% at CER.

Downsides

Challenging Macroeconomic Scenario: Pricing pressure in the United States and Europe has been a staggering issue over the past few quarters. Healthcare reform in the United States has created a degree of uncertainty for medical device companies and has created a less flexible pricing environment. Currency headwinds continue to affect ResMed's overseas sales.

Weak Margins: In the fiscal second quarter, adjusted gross margin contracted 225 basis points (bps) from the year-ago number, primarily owing to higher freight component and manufacturing costs, and unfavorable currency movements, partially offset by favorable product mix changes. Meanwhile, adjusted operating margin contracted 189 bps, thereby building significant pressure on the bottom line.

Estimate Trend

Over the past 90 days, the Zacks Consensus Estimate for ResMed’s fiscal 2022 earnings has moved down by 1.5% to $6.11.

The Zacks Consensus Estimate for its third-quarter fiscal 2022 revenues is pegged at $928.76 million, suggesting a 20.8% rise from the year-ago reported number.

Key Picks

A few better-ranked stocks in the broader medical space that investors can consider are AMN Healthcare Services, Inc. (AMN - Free Report) , Henry Schein, Inc. (HSIC - Free Report) and West Pharmaceutical Services, Inc. (WST - Free Report) .

AMN Healthcare, carrying a Zacks Rank #2 (Buy), has a long-term earnings growth rate of 16.2%. The company surpassed earnings estimates in the trailing four quarters, delivering a surprise of 19.5%, on average. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

AMN Healthcare has outperformed its industry over the past year. AMN has gained 23.8% versus the 62% industry decline.

Henry Schein has an estimated long-term growth rate of 11.8%. Henry Schein’s earnings surpassed estimates in the trailing four quarters, the average surprise being 21.86%. It currently carries a Zacks Rank #2.

Henry Schein has gained 6.1% compared with the industry’s 1.7% rise over the past year.

West Pharmaceutical has a long-term earnings growth rate of 27.6%. West Pharmaceutical 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 currently carries a Zacks Rank of 2.