Respiratory disorders affect so many people these days, including asthma sufferers, and cases of sleep apnea are rising in part due to higher levels of average obesity occurring. Two companies are both working on developing products and systems to alleviate suffering and provide solutions. Do either deserve a place in your portfolio?
ResMed (ASX: RMD) is a $7.3 billion company by market capitalisation, and although its headquarters are in California, it started in 1989 by commercialising a device developed Professor Colin Sullivan of the University of Sydney to treat sleep apnea.
Fisher and Paykel Healthcare (ASX: FPH) also has been working on relieving respiratory sufferers since 1971, and now offers products for sleep apnea, as well as for neonatal care and operating rooms. It is worth $1.89 billion by market capitalisation.
We want both companies to be as successful as possible in achieving developments that will make people's lives better and easier to live normal lives. As investors, though, how do they compare with each other as investments and growing companies?
Due to the specialised nature of the business, both companies have attractive profit margins. In 2013, Fisher & Paykel achieved a 15.19% net profit margin to ResMed's 20.31%.
ResMed has boosted its revenue by almost four times since 2003, and currently stands at $1.6 billion. Net profit after tax over the same period has risen by a compound annual rate of 17%. Fisher and Paykel earned consistently over the past 10 years, and more than doubled its total revenue, but 2003's NPAT of $66.82 million was not much more than 2013's $61.82 million, so ResMed wins for earnings growth.
One strong plus for Fisher & Paykel is dividends. It has a long history of paying dividends, with recent payout ratios ranging from 89% to 105%. ResMed didn't pay a dividend from 2003-2012, and only started in 2013. To get an idea how that would affect investor returns, total shareholder returns gives us the increase in share price plus adds in the dividends received and reinvested to get an annualised growth rate.
Fisher & Paykel's total shareholder return over the past 10 years was an annual average rate of 8.86%. ResMed's came in at 14.07%. The long-term growth in earnings played a bigger part than the dividends payment along the way.
Foolish takeaway
Within the past year, Fisher & Paykel's share price has been performing better than ResMed's — up 66.8% compared to 30.6%. Likewise, Fisher & Paykel has a 31.3 PE ratio and ResMed's stands at 22.7%.
Short-term differences even over a year or two may arise that favour one or the other company. For example, the cost of an investment that could expand future earnings may reduce profits in the near term, of a one-off sale of assets could increase current earnings, but the affect is only for that one year.
It's the long-term growth and consistency in earnings that drives returns you can build your capital up. Both could be offering attractive rates of return, but as an investor you want to maximize your return. You may like both, but you would want the one that pays you the greatest over time.
