Resmed’s (ASX: RMB) second quarter FY22 update, released 27 January, did little to alleviate Goldman Sachs’ concerns that supply shortages will continue to hamper near-term upside. But over the long-term, the broker believes there are more tailwinds to add to the recent recall saga responsible for driving recent earnings higher.
Resmed’s second quarter FY22 update revealed a 13% jump in revenue for the three months to December.
Much of the group’s recent revenue can be attributed to increased demand for its care devices, courtesy of a recent product recall by Royal Philips (AMS: PHIA). ResMed also benefitted from continuing tailwinds from covid-related demand for its respiratory devices, and mask products.
But given that the recall tailwind of $45-55m in the second quarter represented a sharp sequential slowdown from $80-90m in first quarter, Goldman’s is now forecasting the FY22 benefit at $285m, below the guided range of $300-350m.
Unsurprisingly, given that growth didn’t meet analyst expectations the share price has been treading water ever since.
But the share price was up 1.22% at the close today.
But over the slightly longer-term, the broker sees the dual New York Stock Exchange and ASX-listed medical devices giant as a frontrunner within an attractive market with long-term, realisable penetration upside.
While ongoing supply/distribution headwinds add cost and complexity to near-term performance, Goldman’s expects these pressures to progressively ease through the coming quarters.
In short, the broker argues that recent share price softness -22% versus the ASX200 since mid-September – has more to do with macro/sector-wide factors than company-related specifics.
What the broker is alluding to is the attractiveness of the current price, relative to the drivers that are now propelling the stock forward.
Despite lowering the 12-month target price to $35.80, the broker has upgraded ResMed to a Buy rating having concluded that near-term challenges are masking five key longer-term tailwinds, these include:
High profitability, (with a 34% earning margin), strongly cash-generative a robust balance sheet which is 0.5x geared.
A stronger competitive position than across most of its history.
Industry-wide price tailwinds and is also successfully sharing its own cost growth with customers.
Relative to growth, ResMed is the cheapest large healthcare manufacturer on the ASX, with 11%-plus FY22-25 earnings compound annual growth rate (CAGR).
The stock has materially de-rated relative to the market since mid-Sept, affording the best entry point since announcement of the competitor recall.
While ResMed uses a different type of foam across its CPAP devices versus PHIA, the broker concedes that regulatory scrutiny from the PHIA recall could broaden out to other manufacturers.
While such a product recall would materially challenge the business and drive downward revisions to Goldman’s earnings forecasts, the broker believes this scenario remains unlikely.
Similarly, while Goldman’s expects the eventual recovery in new diagnoses, the broker admits that a resurgence of covid cases globally could potentially delay the recovery trajectory in the near term.
While materially lower, ResMed still managed to outperform the broader healthcare sector over the last 12 months.
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