Why the ResMed share price is tumbling after a A$2.5 billion acquisition spree

ResMed (ASX:RMD) has spent around US$1.775 billion on acquisitions in just a couple of years.

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The ResMed Inc. (ASX: RMD) share price is down 11.3% to $14.60 in afternoon trade today after the sleep treatment and general healthcare business reported an adjusted net profit of US$144.5 million on revenues of US$651.1 million for the quarter ending December 31 2018.

This translated into US$1 per share in adjusted (NON-GAAP) earnings, or US84 cents per share in reported earnings.

The top-line result reportedly missed analysts' forecasts by 3%, while the adjusted net income result of US$144.5 million was only marginally ahead of the US$143.8 million delivered in the prior corresponding quarter in a result that has sent shares lower.

Shift into software

ResMed has also been on a huge shopping spree recently that includes the US$800 million acquisition of Brightree in 2016, the US$750 million acquisition of MatrixCare in 2018 and the US$225 million acquisition of Propeller Health in January 2019.

That's around US$1.775 billion (A$2.5 billion) worth of significant deals since 2016 and the majority have been funded by debt.

A lot of the acquisitions are focused in the high-growth software-as-a-service space (Saa) where businesses come with an equally high price tag as these businesses sell for many multiples of sales.

While ResMed's long-term strategy to move into the higher-margin, higher growth, recurring revenue digitally connected health space may pay off over the long term, over the short term it faces ballooning interest costs on its debt pile. Moreover, being SaaS businesses acquired on high multiples they're not contributing much to the top-line as yet versus the balance sheet expansion.

What's an investor to do?

The U.S. scrip is trading on around 29x annualised adjusted earnings per share, which is a little above historical averages.

However, the company's management team has a superb track record, while the ASX scrip on today's big share price falls is starting to look reasonable value again if you're prepared to take a long term view and back the acquisitive strategy.

Motley Fool contributor Tom Richardson owns shares of ResMed Inc. The Motley Fool Australia has recommended 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.

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