The Fisher & Paykel Healthcare Corp Ltd (ASX: FPH) share price has roughly quadrupled over just the past 5 years when including dividends. However, the shares may have got ahead of themselves if the analysts at Goldman Sachs are on the money.
According to a November 24 research note Goldman's is expecting Fisher & Paykel's gross margin growth to slow dramatically.
The analysts label gross margins as a "critical factor" supporting the stock, with professional analysts trained to have a laser like focus on gross margins for medical device businesses.
Rising gross margins represent strong new products and a potential competitive advantage to equal a 'buy' signal, whereas falling margins equal business pressure, downsizing, or competitive problems to often equal a traditional 'sell' signal.
Goldman's believes FPH's gross margin growth is "unlikely to be sustainable" and has slapped a 'sell' rating on the stock.
As an investor it's worth keeping a strong focus on gross margins as their direction can often guide analysts' views on stocks in this peer group.
Goldman's has applied an enterprise value to EBITDA multiple of 22x to help it reach a 12-month share price target of $15.60 for FPH.
Elsewhere it has a 'buy' rating on another sleep treatment business boasting rising gross margins in ResMed Inc (ASX: RMD).
