Key Takeaways:
Current price: $129 Price target: $138 NEW ($112 OLD)
Position size: 2.87% 1-year performance: +14%
ResMed released its 4Q19 earnings with sales up %. Gross margins expanded 120bps thanks to its recent SaaS acquisition consolidation, and better manufacturing and procurement efficiencies. Sales were supported by its SaaS business (+15% growth). Masks keep gaining shares globally: +16% in the US (better adherence and resupply program), +12% outside the US (new product launch). Devices grew 7% in the Americas and were flat outside due to tough comparisons y/y. Going forward we see multiple growth drivers:
· The new “Digital Care Act” passed in Germany should encourage a shift to electronic patient records and broader adoption of digital solutions, favoring ResMed’s product adoption
· A pilot program with Walgreen’s that could bring 5M app users onto RMD’s Propeller offering for monitoring asthma and COPD
The company suffered a large litigation charge ($41M) related to a civil investigation from the US Justice Dept, which other competitors suffered as well and should remain a one-time item. We are raising our price target to $138 after updating our model.
FY20 guidance:
Gross margin consistent with 4Q19 (59.3%)
SG&A 23-25% of revenue
R&D 7-8% of revenue
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