Both ResMed (ASX: RMD) stock and CSL Limited (ASX: CSL) stock have fallen heavily in recent months. Which one is a better opportunity? I'm going to have a look at a couple of factors that would help me choose.
It has been a tough time for ASX healthcare shares in recent months. Some of the problem has been investors' worry about what effect weight loss drugs may have on demand for their services.
For ResMed, the concern is that fewer overweight people may mean less people have sleep apnea issues or chronic obstructive pulmonary disease (COPD). With CSL, the worry has been that its Vifor acquisition is exposed because the drug Ozempic may treat people with kidney disease and related illnesses.
Look at the chart below showing the decline for both CSL stock and Resmed stock since June 2023. They have significantly underperformed the S&P/ASX 200 Index (ASX: XJO) over the same time period.
Image source: Getty Images
Business models
ResMed and CSL are both in the healthcare space, but they operate quite differently.
CSL is a huge ASX biotechnology share that has other segments than just its Vifor operations. CSL has operations in things like vaccines, plasma collection and so on. It has that diversification and can invest significant sums to expand in non-Vifor areas, though it would be a shame for holders of CSL stock if Vifor's prospects aren't as good as first thought.
Resmed has a heavy focus on treating sleep apnea, though it has devices suited for other purposes, such as helping patients who were suffering from COVID-19 impacts. However, COVID-19-related demand is not like it was two or three years ago. The business also has a growing healthcare software as a service (SaaS) exposure.
It's certainly possible that Resmed can diversify its business away from sleep apnea, but I think CSL wins on being diversified and less likely to be affected by weight loss drugs, if the drugs do end up having a material effect, which they may not.
Valuation
It can be difficult to compare two quite different businesses. That's why the price/earnings (P/E) ratio can be a useful tool. However, even this method isn't perfect because sometimes you have a business like CSL investing heavily in research and development. But, if a company requires strong R&D spending every year to maintain and grow profit then it's probably just part of doing business.
We should look at the next year's earnings to take into account what the valuation could mean.
The CSL stock price is currently valued at 27 times FY24's estimated earnings.
The ResMed stock price is valued at 19 times FY24's estimated earnings.
Looking at this, there's a clear difference between the two – Resmed is cheaper.
Foolish takeaway
I haven't been looking to buy either ASX healthcare share for my portfolio, though either could do well as a contrarian buy.
Of the two, I'm drawn more to ResMed because of its lower valuation and the possibility that the market is being overly optimistic about how much long-term demand there may be for the weight loss drugs and too pessimistic about how much it could impact Resmed.
I've been investing in other areas of the market which have fallen hard but seem more appealing to me.
