ResMed Inc. (CHESS) (ASX: RMD) is a healthcare company that specialises in the treatment of sleep apnoea and other chronic respiratory diseases. Let's look at two reasons why it could be a good buy right now:
- Because healthcare
Established firms in the healthcare sector are seen as defensive plays in times of market turbulence. Generally speaking, broader socio-economic factors don't hold much sway over the basic need for healthcare.
If you're sick, you're sick – it doesn't matter who the prime minister is or what Trump's been tweeting about overnight. That's what makes these stocks such great buy-and-hold investments.
Over the last year, the S&P / ASX 200 Healthcare Index has increased over 27%. That's a pretty impressive return for a defensive industry. But also consider that during this same period ResMed actually outperformed the index. Shares in ResMed have increased almost 31% from around $8.52 a year ago to be now valued at $11.15.
And it's not hard to see why: just take a fleeting look over the company's financials for the most recent fiscal quarter. Net income for the period was US$86.1 million, up a healthy 13% versus the same period in the prior year.
So with ResMed you could be getting a growth stock in a defensive industry – not a bad deal.
- It is also focused on new technology
The company lives up to its name as an industry leader in delivering innovative tech solutions for the healthcare sector. That might sound like a whole lot of industry buzz-words, but take for example ResMed's acquisition of Brightree for US$800 million in 2016.
Brightree develops cloud-based clinical software that improves connectivity between clients and helps healthcare professionals deliver better quality care.
This strategic acquisition shows ResMed is willing to put its money where its mouth is in order to pursue opportunities to expand into new market segments.
And so far it's paid off: revenues sourced from the Brightree business were a major contributor to overall earnings in 2017, and have increased in every quarter over the last year.
So how does ResMed fare against its competitors?
Well, a good and readily available indicator to measure the success of companies in the healthcare sector is gross margin.
Companies in this industry profit by being able to charge a hefty premium for cutting edge, highly differentiated products. ResMed's quarterly gross margin over the last year has been pretty consistent, averaging a little over 58%.
Amongst its industry peers, ResMed's result was better than CSL Limited's (ASX: CSL) trailing twelve month gross margin of 52%, but well behind Cochlear Limited's (ASX: COH) 72%, or Ramsay Health Care Limited's (ASX: RHC) 74%.
Unfortunately, this puts ResMed back in the peloton rather than up with the outright leaders
There has also been some recent negative news surrounding legal proceedings lodged against the company by rivals Fisher & Paykel Healthcare Corp Ltd (ASX: FPH) for alleged patent infringement.
This might rattle some more risk-averse investors, especially considering how valuable intellectual property is to companies in the healthcare and tech sectors.
However, those still bullish on ResMed can cite a whole series of claims and counterclaims lodged by the two companies in various courts around the world that have seemingly done nothing to dampen the overall rise in ResMed's share price.
One last thing for Aussie investors to consider is foreign exchange.
ResMed is an American company, so by investing in them you are exposing yourself to the vagaries of exchange rate risk.
Dividends are declared in US dollars, and then converted to Aussie dollars at the rate prevailing at the record date.
So if you see the Australian dollar depreciating against the greenback in the medium to long-term, you may find USD-denominated dividends to be an added incentive to buy the company's stock. But if you have a different view of the relative future strength of the greenback, you may worry you'll see your precious income eroded.
Foolish takeaway
ResMed exemplifies a lot of the most exciting things about healthcare stocks. It's global, innovative, tech-centric, and it isn't afraid to use its ample cash reserves to break into new markets.
However, as with any investment, there are some niggling uncertainties.
The company's most recent quarterly update flagged legal fees as a key driver of increasing SG&A expenses, so any more drawn-out court battles like the ones currently ongoing with Fisher & Paykel could start eating into net income. But for the time being, those healthy financial results still warrant ResMed's inclusion on long-term investors' watch lists.
