Consensus community valuation
Perhaps both. Today, Wednesday 4th September 2024, the ASX got smashed and every sector was in the red, following falls in the US on their Tuesday (Monday was a public holiday over there for Labor Day).
But not ResMed, or FPH either; both made new 12-month highs today:
Tables sourced from: https://marcustoday.com.au/
Below, not many on the left side (12 month highs) but they ran out of room for the 12 month lows (on the right):
After Industrials, Healthcare was the second least worst sector today, and we have those two CPAP providers heading up the new 12-month high share price list. As well as IXI - the iShares Global Consumer Staples ETF that tracks the performance of the S&P Global 1200 Consumer Staples (Sector) Capped Index, so the sort of thing that people turn to when the world goes pear-shaped - even in a zombie apocalypse, they'll still be selling tins of baked beans I suppose.
Health care and consumer staples are generally considered "defensive" sectors" - so "risk off" sectors, when people just aren't feeling the optimism around the near-term potential of share-markets.
Only thing is - when you look at the charts of ResMed and Fisher & Paykel Healthcare, they do NOT look like defensive stocks, they looks very much like growth stocks - their one year charts are all bottom left to top right.
One year ago, I was arguing that while Ozempic and the like did NOT present a major threat to the future viability and growth of ResMed, I wouldn't invest in them because I felt that people would always be searching for better options for their OSA treatment, due to the invasive nature of CPAP and the drawbacks of being connected to a machine via a tube while you sleep. In short, I felt that CPAP as an industry was ripe for disruption by any tech that was easier to use.
So I thought that future competition from something other than CPAP - for OSA specifically - was the thing that concerned me, so I was never going to be a RMD or FPH investor.
Well, here we are, less than a year later and I'm using a Phillips DreamStation CPAP machine connected to a ResMed mask every night after being diagnosed with severe OSA (just shy of 60 episodes per hour, so around 1 per minute on average) and it's fair to say, tending towards the possibility of having a little rethink about my earlier assumptions and opinions...
$RMD have announced their second quarter results, which I'll very briefly comment on. The big news, is their assessment from a trial they are running which indicates that GLP-1's are likely both to increase CPAP adoption and adherence. It will be interesting to see how the market - and the various analysts and commentators - react to this news. If true, it turns the negative thesis on its head.
Their Highlights
• Revenue increased by 12% to $1.2 billion; up 11% on a constant currency basis
• Gross margin contracted 50 bps to 55.6%; non-GAAP gross margin grew 10 bps to 56.9%
• Income from operations decreased 2%; non-GAAP operating profit up 20%
• Operating cash flow of $272.8 million
• Diluted earnings per share of $1.42; non-GAAP diluted earnings per share of $1.88
My Assessment
Strong revenue growth with devices (+11%) leading masks (+9%,...weaker than expected by the market), with the SaaS business growing at 24%.
On supply, AirSense-10 now fully available to all customers. AirSense-11 continuing to be approved in new markets, with Japan the most recent market to be approved. Still 100 markets to be approved.
On return of Phillips, Mike Farrell was bullish about the return of competition - noting that the market is competitive and that Phillips will have to fight their way back from the bottom against the 4th, 3rd, 2nd and best players. Their return for deviced in the US is still pending.
%GM contracted on the PCP comparison, but improved over the prior quarter, with the CFO projecting continued improvement in %GM through the rest of the year (absent any shipping impacts of the current Red Sea problems). %GM was slightly impacted by the mask with magnets safety notice/recall issue - a one-off which has been full dealt with in the Q.
Positively SG&A only increased by 5% (4% on CC), meaning that the these fell as a % of revenue to 19.1% from 20.5%.
The GAAP result at the NPAT level was weak, due mainly a major restructuring that has been implemented in the Quarter. This was a material item, with a $64m restructuring charge hitting the P&L. Hence the restructure announced a few months ago has resulted in a significant streamlining of the business. I'm not a fan of one-off restructuring charges, so we'll have to see over the coming quarters if the changes result in a sustainable leaner organisation. The was the major component driving a declind in NPAT over the PCP.
On a non-GAAP basis, $277m NPAT compares with $244m in the pcp, an increase of 13%.
Cash generation was strong, with operating cash flow of $273m and PPE, Intangible and Acquisition Investing Csh flows of around $32m. In the Q, $RMD bought back around $50m of shares, which they continue to plan to do each quarter going forward.
Overall, a strong result with waters muddied through restructuring charges.
GLP-1 UPDATE
The big news is the reported progress results from $RMD "real world" study of 529,000 patients on CPAP taking GLP-1s. I include the two slides below. Mike touted these results as essentially turning the "GLP-1 will kill CPAP" thesis on its head. Bascially, he said the real world evidence is that it will drive CPAP update and adherence! I'll let the slides talk for themselves, and no doubt there will be significant commentary and reaction to this over the coming days.
Finally, Mike discussed in some detail how innovation in health wearables (Apple, Google, Samsung) is also like to provide a tailwind of increased awareness of sleep health.
OK, that's all from me. Off to teach class.
Good results. Thesis solidly intact.
Disc. Held in RL and SM
I don't see many people talking about this. Apple has probably been working towards this for many years. The Watch already records sleep stages, blood oxygen levels, and calculates sleep respiration rate (algorithmically). This might really open the floodgates for RMD, FPH, SOM, etc.
usually dont get too intersted in quarterlies, but this one did hold some interest. Re GLP-1, RMD seeing no impact across various cohorts, possibly some uptick. Mask sales are strong, and adherence remains strong, which is an indicator of repeat ordering. then i noticed the below...
blue is non GAAP and orange GAAP GM's. still enough to get bears excited i would say in this environment. interesting diversion probably adds to anxiety. RMD spoke to better trend expected through the year says decline mainly higher component costs that are starting to be cycled. we will see
the rest looked good to me.
disc Held
The Market Ear has some interesting observations on obesity, calling it he new AI, as the market obsessed over a new disruption. the US market loves a disruption even a sniff of one. below by Goldman reproduced by TME.
not huge yield - ' need a 'ventilator' to pump this divi yield..lol, USD 0.04400cps Yield: 0.52% , No Franking.
RMD - CDI 10:1 FOREIGN EXEMPT NYSE
$RMD reported 3Q results on Friday. As I'd spent the second half of last week focused on my small cap results, I had to catch up on the recording of the earnings call over the weekend.
Results were pretty much in-line with market consensus: rrevenues were slightly ahead and EPS slightly behind due to lower % GM and higher expenses.
However, it was a fascinating result as the disussion contained a bit of everything impacting the PCP comparisons: tail-end of pandemic, recovery of supply chains, return of demand due to post-pandemic opening up, and the prolonged absence of a major competitor from the market (Phillips recall and aftermath).
Their Highlights
All comparisons are to the prior year period
• Revenue increased by 29% to $1,116.9 million; up 31% on a constant currency basis
• Gross margin contracted 150 bps to 55.3%; non-GAAP gross margin contracted 200 bps to 56.1%
• Income from operations increased 28%; non-GAAP operating profit up 27%
• Operating cash flow of $282.6 million
• Diluted earnings per share of $1.58; non-GAAP diluted earnings per share of $1.68
My Observations
The standout result was in devices, which comprise 55% of revenue. Sales rose by 43% in constant currency, and this was the engine that drove outstanding revenue growth. This had been well-signalled to the market and benefited from two major tailwinds.
First – supply chain. Over the last two years, $RMD has been impacted significantly by supply chain, especially chip, constraints. This had significantly impacted the global roll-out of their new connected AirSense 11 cloud-connected product, which allows customer data to be uploaded to the cloud, shared with healthcare professionals and analysed to provided patient guidance. Previous generation AirSense 10 had been re-engineered to get around constraints. However, the big issue was that just as new customers started returning to GP’s and sleep clinics, supply across the world became constrained. Markets move into management by allocation from available suuply, and waiting times for new devices blew out to many months.
Second, in mid-2021, Phillips a major competitor had a product recall and has essentially been absent from the market while it remediated faulty products with existing customers and redesigned the product, having to go through regulatory approvals all over again. This has given $RMD (and $FPH) reduced competition in the market and exacerbated the supply shortage.
On the call, $RMD indicated that in the USA, AirSense 10 can now fully meet demand in the USA and is now “off allocation” and will get to a normal position in other markets over the next two quarters. Air Sense 11 is lagging, and will continue to see improved availability over the next several quarters. This latter product is still going through regulatory approvals in several markets.
The results call goes into these issues in some detail and provides a great case study into just how long it is taking supply chains to heal, following the disruptions induced by the pandemic and its aftermath (as well as other things going on in the chip industry).
What I found remarkable, is that when you stand back and look at the performance of $RMD over the last 5 years, you see just how well the company has been managed - pandemic, what pandemic! Sales have grown steadily at a CAGR of 12% and Earnings at a CAGR of 23%. (Figure 1 – note: I have used FY23 consensus forecast.)
Figure 1
The Future
Through the remainder of CY23, $RMD will continue to benefit from continuing improvements in supply as more and more of its global markets come into balance, as AirSense 11 is approved and launched, and as Phillips begins to re-establish supply.
CEO Mick Farrell spoke on the call about the overall market opportunity. He noted that $RMD had made a contribution to improving the lives of 156 million people in the last 12 months and remains on track to achieve its goal of 250 million by the end of FY25.
However, $RMD’s eyes remain focused on the global opportunity of 1 billion people suffering with obstructive sleep apnoea that needs to be treated worldwide, to which if you add in COPD asthma and insomnia, you’re talking 2.5 billion people in the total addressable market. Now of course, many (most?) of these people will unfortautely not have access to the healthcare or financial resources needed for $RMD’s products and services. But nonetheless, $RMD remains very bullish about the runway ahead of them.
During Q&A analysts asked Mick about threats from new therapies(e.g. drugs), and I was encouraged by the response and would encourage holders of $RMD and $FPH to listen to the recording of the investor teleconference.
With connected devices, SaaS products and the MEDIFOX DAN acquisition, $RMD are investing heavily in R&D to make maximum use of the data their devices are generating. They already have data for 14.5 billion nights of sleep data, to which they are applying AI and ML technology to be able to provide tailored clinical advice to customers and healthcare professionals, which will potentially drive improved efficacy and efficiency outcomes in the treatment of conditions.
Valuation
Overall, broker valuations edged up following the results, with 3 of the 11 covering analysts nudging up their valuations by about 1% on average.
Market consensus on valuation stands as $36.12 (min. $32.04; max $39.17; n=11; source Marketscreener.com) indicating a modest upside to Friday’s close of $33.71.
I don’t yet have my own model for $RMD, however, I think these estimates span a reasonable range of views as to the extent to which $RMD (and $FPH) have been able to gain a sustainable market lead over Phillips versus the expected increasing competitive intensity that will return over the coming years as Phillips get back into its stride and tries to make up lost ground (Phillips CFO on the record that they will not discount heavily to recover share).
$RMD is on a forward p/e of 40, which is reasonable in its sector given its growth and earnings stability. Referring to Figure 2 below, if you ignore the step up in P/E during late 2021/early 2022, when earnings were hit by the full impact of supply chain constraints, $RMD tends to sit at an average P/E of around 45, so it is not expensive on a historical basis - although the current discount can easily be understood in the current higher interest rate environment, and may actually be high on a recent historical basis.
Figure 2: P/E over last 5 Years
Overall Takeaways
This was a strong result. Due to excellent investor communications, the market understands that the eye-watering quarterly result will not be repeated. However, with the pandemic behind us and supply chains well on their way to full repair, $RMD is well and truly back to business as usual.
I expect to see sustained low teens revenue growth with 15%+ earnings growth over the near to medium term.
As a holder of both $FPH and $RMD, given that the former’s SP has run very hard over the last 6 months, I am considering a re-weighting of my RL portfolio from $FPH to $RMD, maintaining the combination at 6% of my total portfolio. It is great to have two ASX-listed companies as well-managed, global market leaders in hospital and home care segements, respectively.
Disc: Held IRL (2.5%). Not held in SM.