ResMed is a well-established company that has consistently delivered strong performance. If you had invested in the company when they went public, your shares would have appreciated by over 30.000%. There are many global trends that should benefit ResMed, which means that the growth isn't necessarily over. But is now the right time to invest in ResMed? It is what we are going to investigate in this analysis.
This is not a financial advice. I am not a financial advisor and I only do these posts in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
For full disclosure, I should mention that at the time of writing this analysis, I do not own any shares in ResMed. If you would like to copy my portfolio or view the stocks in my portfolio, you can find instructions on how to do so here. I don't own shares in any of their direct competitors either. You can purchase ResMed's shares or fractional shares on eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.
The Business
ResMed was founded in 1989 in Australia but relocated to California, United States, in 1990. It is a global leader in sleep health, breathing health, and out-of-hospital healthcare, primarily focusing on cloud-connectable medical devices for treating sleep apnea, COPD, and other respiratory conditions. ResMed’s innovative product portfolio includes devices, diagnostic products, mask systems, headgear, dental devices, and cloud-based software solutions. ResMed generates 52% of its revenue from devices, 35% from masks and other accessories, and 13% from software as a service (SaaS). The company’s largest market is the United States, Canada, and Latin America, contributing 58% of its revenue, while Europe, Asia, and other regions account for 29%, with the remaining 13% coming from SaaS offerings, mainly in the United States and Germany. A core part of ResMed's strategy is its out-of-hospital platform, which helps professionals and caregivers monitor and manage patient care remotely. Systems like AirView and myAir enable seamless connectivity, making it easier for patients to receive treatment at home. ResMed is a pioneer in digital health, with 19 billion nights of medical data in the cloud and 26 million cloud-connected devices sold across 140 countries. This vast data resource provides valuable insights into patient behavior, reinforcing its market leadership. The company’s products emphasize comfort, connectivity, and intelligence. Known for being compact, quiet, and user-friendly, its devices are integrated into an intelligent ecosystem that ensures real-time monitoring and better patient outcomes. ResMed’s brand promise is to deliver effective, affordable, and comfortable therapies, helping users live healthier lives. It enhances care, reduces the impact of chronic diseases, and lowers costs for healthcare systems worldwide. Its strong brand reputation and extensive cloud-connected ecosystem is what gives ResMed its moat.
Management
Their CEO is Michael Farrell. He joined ResMed in 2000 and held various leadership positions until he became CEO in 2013. Before joining ResMed, Michael Farrell worked in management consulting, biotechnology, chemicals, and metals manufacturing at companies such as Arthur D. Little, Sanofi Genzyme, Dow Chemical, and BHP. He holds a Bachelor of Engineering with first-class honors from the University of New South Wales, a Master of Science in Chemical Engineering from the Massachusetts Institute of Technology, and a Master of Business Administration from the MIT Sloan School of Management. He serves on the Board of Directors at ResMed, the Advanced Medical Technology Association, and Zimmer Biomet. He is also the son of Peter Farrell, the founder of ResMed. Michael Farrell has done a great job as CEO. Under his tenure, the market cap of ResMed has grown from $6 billion to over $35 billion, while also delivering a shareholder return of more than 200%. According to Comparably, Michael Farrell has an employee rating of 85/100, which puts him in the top 5% of similar-sized companies. This indicates that he is well-liked by employees, which is often a positive sign. However, he can also make tough decisions for the benefit of the company, as exemplified by the latest cost-cutting plan. This plan entails ResMed cutting 5% of its positions. These decisions are never easy but have to be made sometimes. I appreciate Michael Farrell's extensive industry experience, his track record of delivering positive outcomes, his ability to make difficult decisions, and his personal connection to the company as the founder's son. Thus, I feel comfortable with Michael Farrell leading ResMed in the future.
The Numbers
The first number I will investigate is the return on invested capital, also known as ROIC. Ideally, you would like to see a ROIC above 10% in all years. ResMed has consistently delivered a high ROIC, achieving above 10% every year for the past decade, which is impressive. ROIC reached a record high in 2022 but dropped in 2023. However, ROIC increased again in fiscal 2024. Although it didn't quite reach the all-time high of fiscal year 2022, it remains the third-highest ROIC that ResMed has achieved, which is encouraging. It is also worth noting that the company has emphasized the importance of ROIC and how they aim to drive a strong ROIC moving forward through strategic investments. I personally like companies that focus on ROIC, and I'm impressed with ResMed's continuous ability to maintain a ROIC above 10% over the past decade
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. The numbers look good for ResMed, as they have only experienced negative growth in one year, which was back in 2015. One year of negative growth is not a concern, especially when it occurred so long ago. ResMed has managed to increase its equity every year for the past nine years, which is encouraging. It is also worth noting that ResMed has increased its equity by more than 10% annually for the past five years, which is impressive.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising to see that ResMed has had positive free cash flow in all years over the past decade. ResMed experienced a significant drop in free cash flow in fiscal year 2022, which was due to increased capital expenditures, partly driven by the acquisition of MEDIFOX DAN. While capital expenditures dropped in fiscal year 2023 compared to 2022, they were still significantly higher than the average over the past five years, which affected the free cash flow. ResMed delivered its highest free cash flow ever in fiscal year 2024, despite capital expenditures being higher in 2024 than in 2020 and 2021, which is impressive. Even more impressive is that ResMed achieved its highest levered free cash flow in fiscal year 2024, which bodes very well for the future. The free cash flow yield is at its highest level since 2016, suggesting that ResMed is trading at its most attractive level in many years, which is something we will revisit later in the analysis.
Debt
Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a three-year period. This can be assessed by calculating the ratio of long-term debt to earnings. After performing the calculation on ResMed, I have determined that the company has a debt-to-earnings ratio of 0,68 years, which is significantly below the limit of 3 years. Hence, debt is not an issue for ResMed.
Black Friday Special Offers on Seeking Alpha (Nov 18 - Dec 11):
For those serious about investing, now is the perfect time to upgrade your tools with these exclusive discounts - available only through these links. Choose the offer that suits you best:
Seeking Alpha Premium: Gain access to comprehensive financial data, expert analyses, market news, transcripts, and more to make informed investment decisions.
Black Friday Price: $209/year (originally $299) + 7-day free trial.
Alpha Picks: Get stock recommendations from a portfolio up +151,64% (vs. S&P 500's +53,42%) since July 2022.
Black Friday Price: $359/year (originally $499).
Alpha Picks + Premium Bundle: The ultimate investment package with a $289 discount!
Black Friday Price: $509/year (originally $798).
I use Seeking Alpha daily for its reliable insights, and these deals are a great opportunity to enhance your investment strategy. Act fast—offers end Dec 11!
Risks
Like any other investment, there are risks associated with investing in ResMed. One risk is the introduction of obesity drugs, particularly GLP-1 drugs, which presents a potential risk because it could lead to a decline in the prevalence of sleep apnea and other respiratory conditions that the company’s devices are designed to treat. A significant proportion of sleep apnea cases are linked to obesity—studies indicate that about 77% of obese patients suffer from this condition. Obesity is also a major risk factor for other chronic conditions like type 2 diabetes and heart failure, which are associated with higher rates of sleep apnea. Therefore, if obesity drugs prove effective in reducing obesity, they could also lower the prevalence of these related conditions. ResMed’s management has estimated that effective obesity treatments could reduce the global number of people with sleep apnea, COPD, or respiratory insufficiency from 1,4 billion to 1,2 billion by 2050. This reduction could directly impact the demand for ResMed’s products, potentially shrinking the addressable market for their sleep and respiratory care devices. Despite these concerns, ResMed’s management sees short-term benefits from the introduction of GLP-1 drugs. These treatments could make patients more health-conscious, encouraging them to seek diagnosis and treatment for conditions like sleep apnea. However, the long-term impact remains uncertain, especially if GLP-1 drugs or similar pharmaceuticals effectively reduce obesity rates or are approved to treat sleep apnea directly.
Macroeconomic conditions pose significant risks to ResMed's operations and profitability, primarily through factors like inflation, supply chain disruptions, and foreign currency fluctuations. High inflation affects the cost of raw materials, electronic components, and wages for ResMed’s 10.000+ employees worldwide, leading to increased production and operational expenses. If ResMed is unable to pass these higher costs on to customers, it can result in squeezed profit margins. Supply chain disruptions, such as recent shipping delays, can further constrain the availability of key components, potentially causing production slowdowns and higher costs due to competitive supply conditions. Additionally, foreign currency fluctuations, especially involving currencies like the Australian Dollar, Euro, and Chinese Yuan, can impact the company's revenue and profitability when converting foreign sales back to U.S. dollars. Interest rate changes and overall economic uncertainty can also reduce consumer spending, leading to lower demand for ResMed’s products and price pressures. In essence, rising costs, supply chain challenges, and currency volatility all contribute to a complex macroeconomic environment that could adversely affect ResMed's growth and profitability.
Competition is a significant risk for ResMed, particularly as the global market for sleep and respiratory care products is highly competitive. Philips, one of ResMed's main competitors, had to recall its respiratory devices, allowing ResMed to gain market share. However, Philips has since reentered various international markets and is gradually rebuilding its position, increasing competitive pressure. With Philips regaining its footing alongside other major players like Fisher & Paykel and regional manufacturers, competition is intense across multiple geographies. Additionally, ResMed’s products compete with surgical procedures, nerve stimulation devices, and dental appliances, which provide alternative treatments for sleep apnea. The development of new procedures or therapies could render its devices less competitive. The same dynamics affect ResMed’s SaaS business, where rapidly evolving technology and low entry barriers mean new solutions could quickly emerge, potentially making ResMed's offerings less attractive.
Reasons to invest
There are also numerous reasons to invest in ResMed. Favorable global trends present a compelling reason to invest in ResMed, as the company is well-positioned to address a vast, underpenetrated market. Over 2.4 billion people worldwide suffer from conditions like sleep apnea, COPD, respiratory insufficiency, and insomnia. While not all of these individuals require devices, the scale of the market offers significant growth potential for ResMed, particularly as awareness and diagnosis rates improve. Two major trends are driving this opportunity. First, consumer technology companies, such as Samsung, Apple, and Fitbit, are increasing awareness of sleep health issues through devices like wearables, which can now screen for conditions like sleep apnea. These advances mean that more people are likely to be identified as needing treatment, creating a new pathway from sleep wellness tracking to medical care. Second, big pharmaceutical companies are raising awareness about conditions that are often linked with sleep apnea. As these companies continue to develop and promote treatments, they are bringing more patients into the healthcare system, indirectly boosting demand for ResMed’s products. This increasing patient awareness, coupled with ResMed's emphasis on home-based, cost-effective treatment solutions, provides a solid foundation for long-term growth.
ResMed’s mask and accessories business is a key growth driver due to its high profit margins, recurring revenue model, and consistent double-digit growth. Unlike one-time device sales, this segment benefits from ongoing demand for replacement parts, such as mask cushions, frames, and headgear, which require regular replacement. As ResMed sells more devices, the need for these replacements grows, supporting long-term revenue expansion. The business has seen strong year-over-year growth, with a recent 15% increase driven by innovative products like the AirFit F40, which has been well-received for its comfort, fit, and ease of use. ResMed's ability to introduce new, high-quality products without price discounts helps maintain robust profit margins. Additionally, effective resupply programs improve patient adherence and drive demand. These programs, which are more consumer-focused, make it easy for customers, especially in cash-pay markets, to order and receive replacement parts. By tapping into underserved markets across Europe, Asia, and other regions, ResMed enhances its growth potential, supported by a steady, recurring income stream from its mask and accessories segment.
Expanding geographic presence is a strategic focus for ResMed, enhancing its growth potential and market reach. The company already offers its products in over 140 countries, targeting sleep clinics, home healthcare providers, patients, and third-party payors. ResMed plans to increase its sales and marketing efficiency in key markets while deepening its presence in high-growth regions to capture new opportunities. ResMed's acquisitions in Asia underscore its commitment to this strategy. In 2015, it acquired Curative Medical, a key move to expand its footprint in China and tap into the growing demand for sleep apnea, COPD, and respiratory care solutions. The acquisitions of HB Healthcare in 2019 and Tong-il in 2021 strengthened ResMed's position in South Korea. These strategic expansions allow ResMed to address local needs, enhance brand recognition, and drive long-term growth in regions with rising demand for sleep and respiratory care solutions.
If you trade in and out of stocks more frequently, you can enhance your results by utilizing VIP trading indicators, which are designed to simplify the trading process, and make it more profitable.
Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 6,92, which is from fiscal year 2023. I have selected a projected future EPS growth rate of 10,4%. (Management expects an average 10,4% growth until 2026). Additionally, I have chosen a projected future P/E ratio of 20,8, which is twice the growth rate. This decision is based on the fact that ResMed has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. Doing the calculations, we come up with the sticker price (some call it fair value or intrinsic value) of $95,69. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy ResMed at a price of $47,85 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is called the Ten Cap price. The rate of return that an owner of a company (or stock) receives on the purchase price of the company is essentially its return on investment. The return should be at least 10% annually, and I calculate it as follows: The operating cash flow last year was 1.401 and capital expenditures were 115. I attempted to review their annual report to determine the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated for maintenance purposes. This means that we will use 81 in our calculations. The tax provision was 244. We have 146,901 outstanding shares. Hence, the calculation will be as follows: (1.401 – 81 + 244) / 146,901 x 10 = $106,47 in Ten Cap price.
The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With ResMed's Free Cash Flow Per Share at $8,86 and a growth rate of 10,4%, if you want to recoup your investment in 8 years, the Payback Time price is $113,50.
Conclusion
I believe that ResMed is a great company with effective management. ResMed has consistently delivered a high ROIC and has just achieved its highest free cash flow and levered free cash flow margin ever. GLP-1 drugs pose a risk to ResMed because they could reduce the prevalence of obesity, a major contributor to sleep apnea and other respiratory conditions. If these drugs effectively lower obesity rates, the demand for ResMed's devices could decline, potentially shrinking the addressable market for their products over the long term. Macroeconomic conditions, including inflation, supply chain disruptions, and currency fluctuations, pose risks to ResMed by increasing production costs and potentially squeezing profit margins. Competition is a risk for ResMed as it faces intense rivalry from major players like Philips, which is regaining its market position. Additionally, alternative treatments, including surgical procedures and emerging technologies, could reduce the demand for ResMed’s products. Global trends favor investing in ResMed, as the company is positioned to tap into a vast, underpenetrated market of over 2,4 billion people with conditions like sleep apnea and COPD. Increasing awareness from consumer tech companies with wearable devices and big pharmaceutical companies promoting related treatments is driving more patients to seek care, boosting demand for ResMed's solutions and supporting long-term growth. ResMed's mask and accessories business is a strong growth driver, offering high profit margins and recurring revenue from the ongoing need for replacement parts. With consistent double-digit growth, innovative products, and effective resupply programs, this segment enhances ResMed's long-term revenue potential. Expanding its geographic presence is a key growth strategy for ResMed, as it enhances market reach and captures new opportunities in high-growth regions. I believe that ResMed could be a great investment and will buy shares below $160, which will give me a 25% discount or more on the Payback Time price and Ten Cap price.
My personal goal with investing is financial freedom. It also means that to obtain that, I do different things to build my wealth. If you have some extra hours to spare each month, you can turn a few hours a week into a substantial amount of money in a few years. If you are interested to know how to do it, you can read this post.
I hope that you enjoyed my analysis. Unfortunately, I cannot do a post of all the companies I analyze. I am available to copy but if you do your own trades, you can follow me on Twitter instead, as I tweet when I buy or sell anything.
Some of the greatest investors in the world believe in karma, and to receive, you will have to give. If you appreciated my analysis and want to get some good karma and show your appreciation, I would kindly ask you to donate a bit to Rolda. It is an organization that helps the animals in Ukraine. Animals are the forgotten souls in a war, and they need all the help they can get. If you have a few bucks to spare, it doesn't matter how little, I will kindly ask you to donate a bit here. Thank you.
Comments