Global sleep treatment business ResMed Inc. (CHESS) (ASX: RMD) this morning posted another solid quarter of operations for the quarter ending December 31 2016, with adjusted net profit up 1% to US$103.3 million and adjusted earnings per share flat at US73 cents per share. This compares to analysts' reported estimates of US70 cents per share. The company also faced some currency headwinds over the quarter due to the weaker Euro and stronger Australian dollar.
Compared to the prior corresponding quarter the result is distorted by the US$800 million acquisition of the Brightree Inc. health software business in April 2016, although excluding the contribution from the Brightree business revenue for the quarter was up 9% to US$496.6 million.
The highlights for the quarter were strong revenue growth in its core North America market and another promising quarter in its developing China market that is part of ResMed's Curative Medical business that is growing quickly in a vast market.
Despite the strong revenue growth the net profit for the quarter was generally flat due to rising administrative and research expenses, with adjusted gross margins of 58.3% marginally down on the prior quarter's adjusted gross margins of 58.9%.
Overall, on a quarter-on-quarter basis that includes the effects of the Brightree Inc acquisition the company appears to have grown adjusted income from operations quite strongly at US$131.6 million versus US$111 million in the prior quarter. This success partly attributed to the strong performance of the Brightree business.
Positioning for the future
In the sleep treatment medical device space it's vital to invest for the future to ensure you have market-leading products to command price premiums, with more strong device sales growth likely to carry on thanks to its AirSense 10 platform that is now supported by cloud-connected technology.
On technology milestones reached for the quarter the company's chief executive officer, Mick Farrell, commented: "We continue to pioneer game-changing products and create value with our solutions. This quarter we announced: FDA clearance for the world's smallest travel CPAP; the creation of SleepScore Labs to focus on consumer sleep wellness; reaching the milestone of one billion nights of sleep data; and new research demonstrating that the use of myAir™ significantly improves patient adherence to sleep therapy in Europe."
It's the company's long-term focus that is one of its most attractive qualities as it embraces the move into digital health care solutions that leads to competitive advantages and bulletproof like revenue growth.
Over time I expect the tech-driven, cloud connected, software-as-a-service nature of the business will lead to rising margins, which mixed with double-digit revenue growth are likely to trigger analyst upgrades and decent share price gains over the medium term.
Dividends and currency exposures
A US33 cent per share quarterly dividend was declared which will equate to an FX-adjusted US3.3 cents per chess depositary instrument (CDI) held by Australian investors who own the CDIs traded on the ASX. Australian investors in ResMed are beneficiaries of a stronger US dollar as each CDI represents a one tenth interest in the company's scrip traded on the New York Stock Exchange.
This is important to note as the ASX scrip will follow the AUD / USD spot rate closely. The primary US scrip currently sells for US$63.60, so for example if the AUD plunged to only buy US63.6 cents tomorrow the CDIs would be worth around A$10 tomorrow, compared to A$8.32 today.
For Australian investors then it's better to buy this stock when the AUD / USD spot rate is stronger as this provides a greater currency related margin of safety. Today the Australian dollar buys US75.6 cents which I expect is marginally above where it will trade over the rest of the year, however if you do expect the US dollar to significantly appreciate over the year ahead now would be a good time to buy the ASX scrip.
If you annualise earnings per share to US$2.92 per share the US scrip trades on around 22x annualised earnings at US$63.60, which looks ok value compared to other healthcare leaders like CSL Limited (ASX: CSL) or Cochlear Limited (ASX: COH), that command higher multiples, but are growing profits at stronger rates.
ResMed again forecast that it intends to return to its share buyback program in fiscal year 2018 after cancelling it this year due to the need to fund the Brightree acquisition. It remains one of the better options on the ASX for long-term focused investors and under $8.40 the stock looks a buy today.
