It's been hard to miss the huge flood of money pouring into ASX listed healthcare stocks over the last 18 months.
Respiratory device manufacturer ResMed Inc. (CHESS) (ASX: RMD) is one of the largest ASX-listed medical companies and has been big winner in 2014 as its share price pushed higher.
But before you buy today, here is what to expect from the company in the year ahead:
The growth plan
The respiratory and sleep-disorder market is huge, affecting 26% of 30-70 year olds and ResMed competes aggressively against local players Fisher & Paykel Healthcare Corp Ltd (ASX: FPH) and non-machine manufacturer Somnomed Limited (ASX: SOM).
But despite being a relatively mature company ResMed is positioned to take full advantage of the growing market driven by aging populations and increased healthcare spending.
To capitalise, ResMed is targeting three key areas for growth in 2015:
- New product developments and innovation
- Expanding geographic markets
- Finding new clinical applications for its products
The company invested US$118 million on research and development activities in financial year 2014 (FY14), around 8% of net revenue, and continues to identify significant medical problems associated with sleep disorders like high blood pressure, strokes and coronary (heart) disease. This aids its growth prospects.
Outlook for 2015
After growing net income by 12.4% in FY14, ResMed looks to be in for another strong year in FY15. First quarter revenue was up 6% over the prior year thanks to new product launches and strong sales in Europe and the Asia Pacific. The two markets represented a combined 46% of ResMed's sales in FY14
Critically however, there are signs of recovery in ResMed's Americas region which grew revenue by 3% year on year. The Americas region accounted for 54% of revenue in FY14, down from 56% the year prior after being hammered by increased competitor activity and declining average selling prices. Investors should watch this going forward.
Should you buy?
ResMed certainly looks set to continue its strong financial performance into 2015, however it doesn't come cheap in my view. The current price-to-earnings (P/E) ratio of 27 is below that of competitor Fisher & Paykel Healthcare at a lofty 34, but still reflects the high premium being assigned to quality healthcare stocks at the moment.
The current share price of $7.15 offers little margin of safety if the company doesn't live up to expectations and with competition nipping at the ResMed's heels, especially in the Americas region, there is notable risk.
ResMed continues to buy back its own shares to compensate investors and push up the share price; however I would add the company to my watch list to buy at a lower price.
