“We can say without reservation that, in investing, spinoffs are the closest thing you can find to a sure thing. It all comes down to the incentives when companies spin off a subsidiary or division and hand out shares to their shareholders. Study after study has shown that after an initial adjustment period of a few months, spinoffs tend to outperform groups of comparable stocks for several years….” Pat McKeough shows how spinoffs and other “special situations” can create windfalls for informed investors.
RESMED INC. $117(New York symbol RMD; Manufacturing & Industry sector; Shares outstanding: 142.7 million; Market cap: $16.7 billion; Dividend yield: 1.3%; Takeover Target Rating: Medium; www.resmed.com) designs, manufactures and distributes CPAP (nasal continuous positive airway pressure) medical devices. They are used to treat patients with sleep apnea, chronic obstructive pulmonary disease and other respiratory conditions.
Sleep apnea can put immense strain on the body. An immediate short-term effect is sleep deprivation, but over time that can result in low energy, irritability, memory loss, lack of concentration and depression.
ResMed’s revenue jumped 50.5%, from $1.55 billion in 2014 to $2.34 billion in 2018 (fiscal years end June 30). The Americas region supplied 62% of the company’s 2018 revenue, while other markets, including Europe and Asia, contributed the remaining 38%. Devices contributed 56% of sales, while masks and accessories supplied 44%.
Overall earnings rose 2.2%, from $345.3 million in 2014 to $352.9 million in 2015. Due to fewer shares outstanding, per-share earnings rose at a faster rate of 3.3%, from $2.39 to $2.47. Earnings then dipped to $352.4 million in 2016, while earnings per share improved to $2.49 a share.
ResMed’s costs to settle a lawsuit, plus acquisition expenses, cut its earnings to $2.40 a share (or a total of $342.2 million) in 2017. Earnings then fell to $2.19 a share (or $315.6 million) in 2018 due to restructuring costs and the impact of U.S. tax reforms.
In the first quarter of fiscal 2019, ended September 30, 2018, ResMed’s revenue rose 12.3%, to $588.3 million from $523.7 million a year earlier. That’s mainly due to the company’s launch of new masks and upgrades to its products.
Earnings in the quarter, excluding unusual items, jumped 23.6%, to $116.3 million from $94.1 million. Earnings per share rose 22.7%, to $0.81 from $0.66, on more shares outstanding.
ResMed ended the quarter with $230.2 million cash and $517.6 million in long-term debt, or 3.5% of its market cap.
The company is using its strong balance sheet for acquisitions to enhance its businesses. For example, it recently paid $225 million for Propeller Health, which makes sensors and software to monitor patients with asthma and other breathing problems. Doctors can use that data to adjust their treatments.
ResMed also has a joint venture with Verily, the medical sciences business of Google’s parent company Alphabet (Nasdaq symbols GOOG and GOOGL). That venture analyzes data from ResMed’s patients in order to develop new treatments.
In addition to acquisitions, ResMed continues to invest in its own products. In the quarter, it spent $38.8 million (or 6.6% of its revenue) on research, up 3.7% from a year earlier.
The company’s $1.48-a-share dividend yields 1.3%. The stock has risen 33% in the past year. It now trades at 31.6 times the forecast 2019 earnings of $3.70 a share.
That’s a high p/e, but reasonable in light of ResMed’s high 40% share of the U.S. CPAP market. As well, with each machine its sells, the company acquires a potential long-term customer for replacement parts. While the CPAP machine lasts five years or more, its tubing, masks and other accessories need to be replaced several times a year.
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