ResMed (ASX: RMD) looks attractive as our analyst believes the market is underestimating competitor weakness and the easing of supply constraints. The company is one of the largest respiratory care device companies globally, primarily developing and supplying flow generators, masks and accessories for the treatment of sleep apnea.

ResMed’s upward share price trajectory stalled in 2022. The global chip shortage forced ResMed to allocate devices to the neediest patients first. In addition, the coronavirus pandemic depressed sleep apnea diagnosis rates, given temporary sleep study clinic closures. However, conditions have improved, with strong device sales and record new patient setups in the third quarter of fiscal 2023.

Morningstar equity research analyst Shane Pronraj believes recent earnings growth is just the start, and expects stronger earnings than market consensus.

Pronraj adds “The only cloud-connected competitor, Philips (AMS:PHIA), is in trouble, subject to the most serious of U.S. Food and Drug Administration, or FDA, product recalls, elevating demand for ResMed’s products. Philips’ issues look set to drag into 2024, allowing ResMed to structurally gain market share, supported by switching costs that underpin the narrow moat.”

Given Philips’ reputational damage, Pronraj expects physicians to prescribe ResMed products more frequently, helping entrench new customers into ResMed’s ecosystem. He expects this to be a key growth driver and for ResMed to command industry market share leadership for the foreseeable future.

ResMed well-positioned in the key U.S. market

Shares in narrow-moat ResMed trade at a meaningful discount of roughly 15% to our USD 258 fair value estimate, or AUD 39 per Chess Depositary Interest. Pronraj forecasts group earnings before interest and taxes (“EBIT”) doubling to USD 2.2 billion by fiscal 2027, from USD 1.1 billion in fiscal 2022, for a forecast five-year compounded annual growth rate (“CAGR”) of 15%.

Pronraj’s overall earnings growth estimate is driven by his forecasted five-year revenue CAGR of 11% and underlying group EBIT margin expansion to 35% by fiscal 2027 from 30% in fiscal 2022. Compared to market consensus, Pronraj is more optimistic on ResMed’s top-line growth and likely margin expansion.

The outlook for ResMed’s software as a service, or SaaS, business, and its markets outside of the Americas is strong. But Pronraj expects the U.S. market to be the key earnings driver and forecast the Americas segment to contribute nearly 60% of sales in the next five years from roughly 55% currently.

Morningstar Investor subscribers can access the special report on ResMed here.