Resmed has become a post FY12 Story
ResMed quarterly falls short on flow generator sales – Company exiting less profitable market segments – Stockbrokers cautious as move may impact on top line growth – Opinions on ResMed remain divided
By Chris Shaw
Sleep disorder group ResMed lifted 4Q sales by 12% to US$315 million but this result was behind the market consensus estimate of $327 million. The shortfall reflected a decline in US flow generator sales, partly the result of ResMed deciding to exit less profitable market segments.
On the positive side, Deutsche Bank notes mask sales for ResMed remained strong during the period, rising by 17% when adjusted for foreign exchange moves. With management moving out of low margin market sectors, gross margins were higher than expected.
But for Deutsche Bank these positives are offset by the unexpected contraction in US device sales in the period. Deutsche Bank suggests this implies increased risk of price competition and distributor market power, something that could be made worse by competitive bidding.
The risk in Deutsche’s view is ResMed’s strong position in the fast growing and resilient mask business may be diluted, which could translate to more subdued earnings growth while the operating environment remains difficult.
As RBS points out, there appears to be a growing disconnect among all participants in the sleep disorder market, as while ResMed is undergoing a mix shift from lower priced basic devices to higher-end units, payers are decreasing reimbursement levels through competitive bidding.
This implies the decision by ResMed to hold price lines are a precursor to losses of market share, while top-line growth is also likely to be impacted. RBS also suggests there are increased risks to ResMed’s main annuity stream through lower accessory sales. This all adds up to limited scope for share price outperformance over the medium-term.
One positive is ResMed will now be cycling weaker comparable sales numbers, though as Goldman Sachs suggests the fact the company has now reported four consecutive quarters of soft growth is a reasonable bellweather for the medium-term growth outlook.
From a longer-term perspective, UBS continues to see upside, suggesting ResMed has opportunities in ventilation and high end CPAP machines. As well, recent share price weakness increases the chances of a more aggressive share buyback in the broker’s view.
On the back of the quarterly update from ResMed, securities brokers covering the stock have in general made minor changes to earnings estimates. RBS Australia has lifted FY12 earnings per share (EPS) forecasts by 2.5%, while UBS has lowered its EPS forecast for the year to US18c from US19.6c previously.
Goldman Sachs has also trimmed its EPS estimates by 3.5% in FY12 and by 2.6% in FY13, reflecting lower flow generator sales growth assumptions offset by upgrades to gross margin assumptions. Changes to forecasts have impacted on price targets, Goldman Sachs lowering its target to $3.00 from $3.35 previously and Citi to $4.13 from $4.39.
Credit Suisse is the only broker to change its rating on ResMed post the quarterly, downgrading to a Neutral recommendation from Outperform previously. This reflects the view RedMed appears fair value at current levels given existing growth issues in the US flow generators market.
Overall, the FNArena database shows ResMed is rated as Buy three times and Hold five times, while Goldman Sachs also rates ResMed as a Hold. This reflects the view while the stock appears attractive on FY13 metrics, the focus of the market remains FY12.
The brokers with Buy ratings are looking beyond the current year, adopting a longer-term approach that suggests value once the market moves past its current tough trading conditions. As BA-ML notes, this should become even more apparent as benefits of a product mix shift being undertaken by ResMed eventually flow through.
Shares in ResMed today are weaker and as at 11.35am the stock was down 8c at $2.53. This compares to a trading range over the past year of $2.49 to $3.60.
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