Resmed’s sales and profits got a boost during the pandemic with a sharp rise in demand for its ventilators and other respiration devices. Even as the pandemic eased, the gains continued as the company introduced more products and expanded its software offerings. Today, the company’s outlook remains attractive, not just for its CPAP machines but also for its broader treatment potential in treating sleep apnea, a condition that can lead to various health complications.
Studies estimate that nearly one billion people worldwide have obstructive sleep apnea, with more than 85% undiagnosed. Another 480 million people have COPD, expected to reach almost 600 million by 2050. That’s a large market, and the firm’s dominant position and the widening reach of its services should keep it growing for the long term.
Meanwhile, the stock trades at 24.9 times the company’s forward earnings forecast while offering a modest 0.9% yield too.
RESMED INC. (Symbol RMD on New York; www.resmed.com) primarily makes and sells medical devices for people with sleep apnea, chronic obstructive pulmonary disease (COPD), and other chronic diseases. These include CPAP (nasal continuous positive airway pressure) systems for sleep apnea and both invasive and non-invasive ventilators for chronic obstructive pulmonary disease (COPD).
ResMed’s business model includes recurring revenue from replacement parts and accessories. The company also collects valuable data from its devices, strengthening customer engagement and brand loyalty.
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ResMed has expanded into the software-as-a-service (SaaS) business, providing platforms for home medical equipment providers. These provide ongoing access to software solutions that support durable or home medical equipment (DME/HME) providers with cloud-based remote monitoring, therapy management systems, analytics, documentation management and new reimbursement method implementations.
This segment currently contributes 12% of ResMed’s revenue but is a strong growth area.
In January 2024, rival Philips NV announced it would halt U.S. sales of new sleep apnea machines in a $1.1 billion settlement with U.S. regulators. This development should benefit ResMed in the U.S. market.
<h3>Growth Stocks: Expansion should accelerate globally</h3>
ResMed spends around 7% of its revenue on research and development. The company’s latest CPAP model, AirSense 11, introduced new features such as a touch screen and digital enhancements.
ResMed’s main manufacturing facilities are located in Singapore, Australia, the U.S., Malaysia, and China. In November 2022, the company opened a new Advanced Manufacturing Centre in Singapore, significantly increasing its production capacity.
In the three months ended September 30, 2024, ResMed’s revenue rose 11.1%, to $1.22 billion from $1.10 billion a year earlier. The increase came from higher demand for its sleep and respiratory care devices, as well as its software offerings. Excluding one-time items, earnings per share in the quarter rose 34.1%, to $2.20 from $1.64.
Growth Stocks: High P/E reflects the company’s strong growth outlook
ResMed’s shares now trade at 24.9 times the company’s forecast 2025 earnings of $9.35 a share.
Many conservative investors think that’s too high for a medical-technology stock. These investors fear that ResMed could run into competitive challenges as technology evolves and competing treatments emerge for sleep apnea, chronic obstructive pulmonary disease, and other respiratory conditions. Still, the company has demonstrated its technical and marketing capabilities by more than quadrupling its North American market share in 10 years.
We think that it pays to be wary of most high-P/E stocks, especially those that have risen due to attention from the broker/media limelight. However, ResMed gets only a modest amount of investor attention, especially considering its success to date, and the strength of its business model.
Meanwhile, longer term, the outlook for sleep apnea products and services is strong. As that treatment becomes more common for younger people, and in a wider geographical area due to spreading global prosperity, the company’s sales growth—and that of other sleep apnea equipment makers—should speed up. Moreover, ResMed’s Digital Health Solutions business provides an exciting new growth area for the company and its investors.
Recommendation in Power Growth Investor: ResMed Inc. is a buy.
