3 reasons ResMed shares 'are just too cheap!'

This stock could still produce healthy gains, according to one fund manager.

| More on:
ventilator mask

Image source: Getty Images

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

The Resmed CDI (ASX: RMD) share price has risen 46% over the last six months, and a fund manager reckons there are more gains to come.

This ASX healthcare share has been through a lot in the past year as investors worried about the effects of weight loss drugs on its business, as we can see on the chart below.

Created with Highcharts 11.4.3ResMed PriceZoom1M3M6MYTD1Y5Y10YALL14 May 202314 May 2024Zoom ▾Jul '23Sep '23Nov '23Jan '24Mar '24May '24Jul '23Jul '23Oct '23Oct '23Jan '24Jan '24Apr '24Apr '24www.fool.com.au

The latest financial updates have shown the company continues to deliver a strong, profitable performance. The FY24 third-quarter earnings before interest and tax (EBIT) beat market consensus estimates by 7%, and management was feeling confident about the outlook in the conference call, according to fund manager Firetrail.

Firetrail said there has been "significant noise" about ResMed shares because of a GLP-1 drug trial being conducted on sleep apnea patients.

The fund manager is still bullish about the company for a few different reasons. I'll run through each of them below, leading Firetrail to say that Resmed shares are "just too cheap!".

Manageable impacts from weight loss drugs

Firetrail said its view has been that increased awareness of CPAP (continuous positive airway pressure) therapy will "largely offset the negative impact of patient drop-out due to weight loss".

With its FY24 third-quarter update, Resmed updated its findings from the dataset of 660,000 patients with a sleep apnea diagnosis who have taken a GLP-1 drug in the past two and a half years.

Firetrail commented:

While not proving causation, only correlation, this data shows that GLP-1 users are 10.5% more likely to start CPAP therapy and have mask resupply rates 3-5% better than non-GLP-1 patients with sleep apnoea.

Revenue growth

The fund manager said competitor Philips' consent decree "looks likely to keep it out of the US CPAP device market for a number of years."

Firetrail pointed out that Resmed recently reported record device sales in what is its seasonally weakest quarter. In the FY24 third quarter, the business generated revenue growth of 7%, taking the revenue to $1.2 billion.

The fund manager suggests the business is growing its market share amid these record sales.

Gross profit margin

The third positive area that Firetrail discussed for Resmed shares was the gross profit margin. Firetrail said the weaker gross profit margin was due to fight and manufacturing cost pressures, but these effects are only transitory.

Resmed's FY24 third-quarter update showed a 160 basis point (1.60%) expansion for the gross profit margin.

Pleasingly, the Resmed gross margin is now "almost back to pre-COVID levels".

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended ResMed. The Motley Fool Australia has positions in and has recommended ResMed. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Healthcare Shares

a biomedical researcher sits at his desk with his hand on his chin, thinking and giving a small smile with a microscope next to him and an array of test tubes and beackers behind him on shelves in a well-lit bright office.
Healthcare Shares

Broker says this ASX 200 biotech stock is a top buy

Let's see what Bell Potter is saying about this biotech.

Read more »

Cropped shot of an attractive young female scientist working on her computer in the laboratory.
Healthcare Shares

Why CSL shares are a buy today despite the looming Trump tariffs

A leading expert believes CSL shares are still trading for a bargain today. Here's why.

Read more »

A businesswoman pulls her glasses down in shock to look at the bad news on her computer.
Healthcare Shares

Why did the Telix share price just crash 16%?

Investors are sending the Telix share price plunging today. But why?

Read more »

Broker analysing the share price.
Healthcare Shares

Expert: 2 ASX healthcare stocks to avoid before reporting season

Not all healthcare stocks are created equal.

Read more »

A group of people in a corporate setting do a collective high five.
Healthcare Shares

Should I buy Pro Medicus or CSL shares ahead of earnings season?

The ASX healthcare sector may be currently undervalued.

Read more »

Overjoyed man celebrating success with yes gesture after getting some good news on mobile.
Healthcare Shares

Why Mesoblast shares can keep storming higher

More big returns could be on the way for buyers of this high risk stock according to Bell Potter.

Read more »

Doctor doing a telemedicine using laptop at a medical clinic
Healthcare Shares

The Mesoblast share price just rocketed 38%! Here's why

ASX investors just sent the Mesoblast share price up 38%. But why?

Read more »

couple having a happy discussion with a banker
Healthcare Shares

Expert: 4 ASX healthcare stocks to buy ahead of reporting season

Could these ASX healthcare stocks be good additions to your portfolio?

Read more »