Sleep treatment specialist ResMed Inc. (CHESS) (ASX: RMD) posted a predictably solid final quarter to its 2016 financial year with adjusted revenues up 8% to US$489.7 million and adjusted net income up 8% to US$104.4 million over a quarter that included the initial effects of its US$800 million Brightree acquisition.
The quarterly dividend was also lifted 10% to US$3.3 cents per share, while the share buyback remains temporarily suspended as the company looks to save cash to adequately finance the Brightree deal.
Both the Americas and EMEA regions produced solid high-single digit revenue growth on the prior comparative period and the result's only lowlight was the fall in gross margins over the prior corresponding period.
Wall Street healthcare analysts are trained to focus on margins for medical device businesses almost above all other metrics as falling margins can spell trouble in the form of competitive pressures, downsizing and falling earnings. The margins have fallen as the company has been reportedly forced into price concessions for its core sleep treatment flow generators and masks, especially in the competitive US market.
However, much emphasis has been placed on the ability of the Brightree acquisition to transform the business into a tech driven, margin-expanding medical device company. Quarter-on-quarter gross margins are already up to 58.1% thanks to the initial effects of the Brightree acquisition on the overall results.
Brightree is a software-as-a-service cloud-driven, home-health monitoring, business billing and administration service provider that ResMed will look to leverage to achieve its long-term ambition of being a tech-leader in the home healthcare and medical device space.
Foolish takeaway
For Australian investors the company offers excellent exposure to a stronger US dollar and the tailwinds of the healthcare sector. The company is also founder led and has a bulletproof track record of revenue growth thanks to its emphasis on developing market-leading products in its field of sleep apnea treatment. In this sense it is similar to leading hearing aid device business Cochlear Ltd (ASX: COH) and product quality will ultimately be the driver of its ability to grow margins.
At $8.60 the stock ticks the boxes as a good opportunity for long-term focused ASX investors, as the valuation is not outlandish and I expect it can continue to deliver consistent growth long into the future.
