The ResMed Inc (ASX: RMD) share price is down over 30% from early August. Some fund managers now think that the ASX healthcare share is an opportunity after its decline.
To briefly outline what the company does, it's a provider of devices (including CPAP machines) and software that help people with sleep apnea, chronic obstructive pulmonary disease (COPD) and other chronic diseases.
Why has the business fallen so harshly? It's because a significant number of people reportedly have sleep apnea due to being overweight, and there are new drugs being developed that supposedly can help with weight loss, such as Ozempic. If less people are overweight it could mean less people need help with sleep apnea.
But, fund manager Chris Kourtis from Ellerston Capital thinks the possible downside for ResMed has been overblown.
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Why this fundie says ResMed shares are a buy
According to reporting by the Australian Financial Review, Kourtis revealed that there are a couple of names that he had invested in that have been "smoked – absolutely pulverised" and Ellerston Capital is "happy to now be long on a couple of those".
Kourtis had avoided CSL Limited (ASX: CSL) shares until recently, meaning the decline didn't hurt his fund. He recently invested in CSL, saying that it's "screening really cheap".
But, it was also revealed that ResMed shares were another new addition to the Ellerston portfolio after the recent price pain. Kourtis said:
[ResMed] is in the CSL camp. It's no longer an expensive defensive. It's now become an oversold, cheap defensive. The market has got it wrong.
I love buying bombed out names. Sometimes you catch a falling knife but if your investment thesis holds true, and it's oversold for the wrong reason…you strengthen the position.
He isn't fazed by the people who believe in the potential growth of Ozempic. He suggests that the decline of the ResMed Inc share price is like the sell-off of Harvey Norman Holdings Limited (ASX: HVN) shares when Amazon was launching in Australia in 2017.
Kourtis said:
People were acting like JB Hi-Fi was never going to sell another flat screen again. That stock was at $22. In two years it was $50. How can the market get it 100 per cent wrong? It happens all the time.
What is the valuation?
The forecast on Commsec suggests that the business could generate earnings per share (EPS) of $1.18 in FY24 and then $1.30 of EPS in FY25. This would mean the ResMed share price is valued at 19 times FY24's estimated earnings and 18 times FY25's estimated earnings.
It's a lot cheaper than it has been and it now represents good value, according to Kourtis. It will be fascinating to see if he's right over the next three to five years.
