Key Takeaways:
Current price: $117 (pre-market) Price target: $109
Position size: 3% 1-year performance: +15%
Resmed released its 2Q19 earnings last night. The company missed on sales by 3% vs. consensus mostly in its Rest-of-World devices segment. They beat on the EPS line helped by better margins (+90bps GM expansion due to increasing production in Singapore and product mix) and taxes. We think devices sales will soften a bit, phasing out of the #2 and #4 markets (Japan & France) reimbursement changes that boosted their sales last quarter. However their core US business performance (masks and flow generators) is still strong with sales growth +9% y/y and EBIT +15%, taking shares from competitors. Their SaaS investment through the Brightree acquisition in early 2016 is being questioned this quarter as sales are slowing down. Due to the end customers in home/durable equipment consolidating, there is currently some pricing pressure in this SaaS business category. If this trend continues, we think Resmed could be forced to recognize goodwill impairment on this acquisition. We had highlighted last quarter that the shares appeared fully valued, so we are not surprised by today’s stock reaction following a sales miss. However the long-term thesis is still intact, and we believe the stock will recover over time.
· FY19 guidance updated:
ü Gross margin consistent with 2Q19 (58.9%)
ü R&D up to 7-8% from 6-7% due to Matrix and Propeller integration
ü Verily JV (with Google) will generate $25-30M in losses – no break-even timeline guidance given
ü Propeller Health acquisition now dilutive by 2-3 cents from 1-2 cents (1% of FY19 EPS)
ü Leverage up to 1.3x from 0.1x to fund the MatrixCare and Propeller acquisitons
ü Buyback suspended
Thesis on RMD:
- Leading position in the underpenetrated sleep apnea space
- Duopoly market
- New product cycle
- Returns of capital to increase: ~1% share buyback/year (back in FY18), dividend yield of 2%
$RMD.US
[tag RMD]
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109