ResMed Inc (ASX: RMD) has reported record first-half profits of US$167 million, or about $191 million Australian dollars. The share price is down by about 5% today, putting the company on a forward P/E of around 19, based on extrapolating the first-half result. Revenue for the quarter to December was up just 1% on a constant currency basis and was below most analyst forecasts.
The main reason for the lack of revenue growth was a decrease of 2% in revenue from the Americas, which was a drag on overall results. In an hour-long conference call, key executives explained that the falling revenue was a result of challenging market dynamics, resulting from the competitive bidding required under the new Medicare program in the US. On top of that, competition has put pressure on pricing, although the company isn't giving away too much information in that regard.
There are good reasons to believe that the poor result from the US will be a temporary glitch. In the long term, Medicare is supposed to provide more Americans with health cover, so that should be a positive for ResMed. Indeed, as diagnosis of sleep apnoea becomes easier, we should see increasing demand for the company's products. In this regard, the trend towards home sleep testing should help the company.
The executives were buoyant about the recent release of the Airfit P10 which is apparently "flying off the shelves." Some months ago, competitor Fisher & Paykel Healthcare Corp Ltd (ASX: FPH) released the PilairoQ, which was sold as being a quieter mask. ResMed's answer to the PilairoQ is the Airfit P10: a lighter, quieter mask that the ResMed CEO, Michael Farrell, touts as "the most comfortable, quiet and effective mask that we have brought to the market."
The company is also making headway with its data management software solutions, EasyCare Online and ResScan. The former allows clinicians to monitor patients' use of ResMed devices, and the latter allows patients and clinicians alike to gain greater insights into their obstructive sleep apnoea. ResScan allows patients to review the rate of apnoea and hypoapnoea events, as well as pulse rate and even whether the patient is snoring. This allows patients to better understand their specific condition and to better manage it.
While the most recent results may have disappointed analysts, I believe this is a good opportunity to buy shares. As the graph below shows, ResMed has grown NPAT solidly over the last 10 years, and based on the first-half result, FY 2014 should continue that trend.
Foolish takeaway
Despite difficult conditions in the US, ResMed continues to grow. The company's cash hoard of about $1.1 billion makes it a secure investment and puts it in a position to invest in growth well into the future. The company can also afford to buyback shares or increase the dividend. More than anything, the company will continue to serve sleep apnoea patients because the condition is related to both age and weight. This positions ResMed to profit handsomely from increasing obesity and an ageing population. I find ResMed shares an attractive investment, at current prices.
