UBS & Macquarie deliver ratings on ResMed Inc. ahead of profit report

UBS cuts rating on ResMed Inc. (CHESS) (ASX:RMD) to "Neutral" and says the robust earnings outlook is captured in the price, while Macquarie retains "Underperform", saying the stock looks expensive compared to Australian healthcare peers

| 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

Brokers are cautious on medical device group, ResMed Inc. (CHESS) (ASX: RMD), ahead of the group's 3Q18 results Friday due to the stock's current valuation levels. 

UBS cut its rating to "Neutral" from "Buy" due to ResMed's recent share price performance, following around a 15% gain in the medical device group's shares over the past six months. 

"… With the stock trading at an EV/EBITDA premium to market of 76% (vs two-year historic average of 50%) we believe the robust earnings growth outlook is largely captured in the share price," it said in a research note. 

"RMD is trading on 29x 12-month forward consensus EPS (FactSet) representing an 86% premium to the ASX200 industrials average. This compares to two-year averages of 24x and 54% respectively". 

The broker also revised up its EPS forecasts by 7%, 3% and 1% over FY18E, FY19E and FY20E, respectively. It also lifted its share price target to US$104 from US$96 due to a move to a DCF-based valuation methodology. 

Macquarie meanwhile, kept its "Underperform" rating on the stock, with ResMed's relative valuation to Australian healthcare peers one reason for the cautious tone. 

"Current valuations for RMD appear fair relative to domestic healthcare peers on a consensus PE/growth basis but slightly expensive based on Macquarie forecasts," the broker said in a research note. 

It added that compared to both Cochlear Limited (ASX: COH) and CSL Limited (ASX: CSL), ResMed's "re-rating has been more substantial." 

The broker has ResMed on a current two-year P/E relative of 18% compared to Cochlear on 13% and CSL on 10%. 

Macquarie added that ResMed's risk/reward profile was skewed to the downside, with its DCF valuation on a price scenario implying 19% downside to the current share price. 

"With scenario analysis showing the risk/reward profile as skewed to the downside as well as noting limited appeal on a PE/growth basis, we see these factors as supportive of our investment rating," it said. 

For Friday 3Q18 result, Macquarie is looking for growth in ResMed's masks and accessories as well as underlying trends in gross margins and any changes to expectations for the effective tax rate in FY19. It is forecasting 3Q18 non-GAAP NPAT of US$124 million. 

As at lunchtime Tuesday, ResMed's Australian shares were down 0.2% to $12.80, while Cochlear gained 1.7% to $185.67 and CSL was up 1.2% to $161.43.   

Broader Australian healthcare stocks also gained, with Primary Health Care Limited (ASX: PRY) up 0.8% to $3.76, Ramsay Health Care Limited Fully Paid Ord. Shrs (ASX: RHC) up 0.9% to $63.25, Sonic Healthcare Limited (ASX: SHL) up 1.2% to $23.35 and Healthscope Ltd (ASX: HSO) up 0.3% to $2.04. 

Motley Fool contributor Gabriella Hold has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Ramsay Health Care Limited and ResMed Inc. 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 Scott Phillips.

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 »