Are ResMed Inc. (CHESS) shares in the buy zone?

ResMed Inc. CHESS (ASX:RMD) is a high-quality business, but it is arguably fully reflected in the current share price.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Medical device company ResMed Inc. CHESS (ASX: RMD) which specialises in treating sleep-disordered breathing has seen its shares slip by approximately 5% over the past 12 months which is significantly better than the 19% slump in the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).

As one of the first companies to report its results for the six months ending 31 December 2015, investors are already armed with fresh data to analyse.

For the half year, revenues increased 8% to US$866 million, gross margins shrank to 58.3% from 62.3% in the prior corresponding period, and diluted earnings per share declined from US$1.22 to US$1.21.

Importantly, on a constant currency basis, revenues increased by 14% with unfavourable currency movements impacting revenues by approximately US$49 million.

The key driver of the improved sales result were the North and Latin American regions which experienced gains of 23% in flow generators and 11% in masks, and other accessories. Meanwhile, markets outside of North and Latin America experienced declines in both product groups which in total led to a decline of 4% in sales for these regions.

ResMed is undoubtedly an above average company, so short-term gyrations in sales and earnings need to be kept in perspective.

Having said that, the stock does trade at a premium in recognition of the company's quality. This means the stock is always at risk of being de-rated if the market takes a different view as to the group's growth outlook.

For this reason, it's important investors keep a close eye on peers such as Fisher & Paykel Healthcare Corp Ltd (ASX: FPH) and Somnomed Limited (ASX: SOM) to help gauge how the industry at large is fairing and also whether competitive pressures are encroaching on ResMed's market share.

With the above factors in mind, based on analyst consensus forecasts (source: Thomson Consensus Estimates) of earnings of 31.8 cents per share and with ResMed's share price at $8.04, the implied financial year 2016 price-to-earnings ratio is 25 times. That is arguably a relatively full price to pay for the stock which could mean the stock is not yet in the buy zone.

Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

More on ⏸️ Investing

A white and black robot in the form of a human being stands in front of a green graphic holding a laptop and discussing robotics and automation ASX shares
Technology Shares

Joining the revolution: How I'd invest in ASX AI shares right now

Advances in artificial intelligence (AI) could usher in a new industrial revolution. Here’s how you can invest in it.

Read more »

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »