Shares in narrow-moat ResMed RMD remain undervalued following a solid first-quarter fiscal 2025. Underlying earnings before interest and taxes (“EBIT”) of USD 406 million was 1% higher than fourth-quarter fiscal 2024, with sales slightly up on increased product demand and underlying EBIT margin up a strong 45 basis points to 33%.

Selling, general and administrative (“SG&A”) expense was a highlight, decreasing by 28 basis points sequentially to 20% of revenue. First-quarter revenue and earnings met our forecasts, and we leave our long-term estimates largely unchanged. Our forecast five-year revenue and EBIT compound annual growth rates are 8% and 10%, respectively, broadly consistent with ResMed’s five-year guidance for high-single-digit revenue growth and higher earnings growth. We raise our fair value estimate by 2% to $40.50 at current exchange rates, largely due to the time value of money.

Sales outside the Americas and software as a service (“SaaS”) revenue grew by 5% and 3%, respectively. Together, they more than offset comparative weakness in US sales, down 3% sequentially. We forecast margin expansion as ResMed’s sales mix continues to shift to higher-margin masks and the cost inefficiency of simultaneously producing older AirSense 10 devices ceases. Our midcycle 34% EBIT margin forecast is broadly unchanged. The global sleep apnea market is still underpenetrated, with most patients being undiagnosed. A key trend that we think is helping boost new patient diagnoses is wearable technologies such as the Samsung Galaxy Watch and Apple Watch that detect signs of sleep apnea.

Product innovation supports our forecast five-year US masks revenue compound annual growth rate (“CAGR”) of 10%. ResMed announced its first fabric mask, the AirTouch N30i, launching in the US in November 2024 at a price premium. This is a welcome improvement over rubber, mimicking the fabric of a pillow to create a more comfortable and breathable experience.

Business strategy and outlook

ResMed is taking a “smart devices” and Big Data approach to further entrench itself as one of the two leading players in the global obstructive sleep apnea, or OSA, market. With cloud-connected devices, physicians can monitor patient compliance and encourage continued use. Higher adherence supports both reimbursement rates from payers and the resupply of masks and accessories. ResMed also plays a key role in producing clinical data that demonstrates treatment can minimize related risks such as hypertension, stroke, heart attack and Alzheimer’s disease. Through its own testing devices and education, ResMed seeks more widespread diagnosis and treatment of OSA.

The global OSA homecare device market, is a two-player duopoly with over 80% estimated market share split between ResMed and Philips, with ResMed the market leader in the majority of the 140 countries it competes in. The market offers a large global growth opportunity as penetration within developed markets is estimated at one fifth of the roughly 15% prevalence, and emerging markets are essentially untapped. In the US, we estimate roughly half of the 22 million people diagnosed with OSA are treated with continuous positive airway pressure, or CPAP, with another 34 million remaining undiagnosed. ResMed operates in over 140 countries with over 900 million people estimated to have sleep apnea globally, indicating the long runway for growth.

ResMed has made acquisitions of home healthcare software platforms as it seeks to leverage the trends of digital health and providing care in a lower-cost setting. Brightree, acquired in 2016, and MatrixCare, acquired in 2019, offer business management software for a range of home health providers. ResMed is currently directing significant capital to this area, and although high returns have largely been unproven, we think the move has been strategically sound given the structural industry tailwinds.

ResMed has a minority stake in Nyxoah who are developing a neurostimulation implant to treat OSA. Although we see little near-term risk from this therapy due to the higher cost and invasive surgery needed, ResMed’s minority stake hedges some risk from emerging competition.

RMD bulls say

  • The long-term growth opportunity for respiratory homecare devices is sizable as both developed and emerging markets are still significantly underpenetrated.
  • The focus on cloud-connected devices has led to increased adherence, supporting both reimbursement rates and the resupply of masks and accessories.
  • ResMed stands to benefit from Philips’ significant product recall and the launch of its new flagship product, AirSense 11.

RMD bears say

  • Market share gains from Philips’ product recall may be limited as affected customers can wait for a replacement unit, purchase an alternative Philips product, and ResMed’s supply chain may be constrained.
  • Reimbursement rates and pricing are under threat as CMS continues to seek savings in the Medicare program and newer treatments such as neurostimulation implants are emerging.
  • ResMed is largely unproven in homecare business management software, an area it is currently directing significant capital to and currently achieving organic revenue growth of midsingle digits.

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