A Delaware corporation formed in 1994, ResMed Inc. (RMD, Financial) is a global leading designer, developer, manufacturer and marketer of medical products for the diagnosis, treatment and management of sleep-disordered breathing (SDB) and other respiratory disorders. For the quarter ended in Dec. 31, 2013 ResMed reported a 2 percent increase (a 1 percent increase in constant currency basis) in revenue over the quarter ended in Dec. 31, 2012. However, these earnings failed to meet analyst estimates; and not without a reason. A relatively poor performance was expected due to continued pressure in the United States, especially as a consequence of the market's restructuring due to competitive Medicare bidding. This might also be one of the reasons why this stock still remains undervalued.
With strong historical fundamentals -virtually no debt and very high free cash flow- ResMed might be just the stock you needed to finally get a good night sleep. Why is that? Let's take a closer look.
A strong strategy
ResMed is dedicated to developing innovative products to improve the lives of those who suffer from the aforementioned conditions. As any other medical-device firm, the company must innovate and introduce new products in the marketplace successfully or possibly face significant pricing pressure and the suffering of sales and margins. Last quarter, research and development expenses represented 7.7 percent of revenue. ResMed's products include devices, masks, humidifiers, screening/diagnostics, and accessories. Now, it has revealed in its Annual Report a three-part strategy that aims to grow its product portfolio.
This plan begins with growing in the SDB market, using cash flows from the SDB products it already manufactures and commercializes to expand into respiratory care. Finally, it looks forward to use those cash flows to expand into cardiology and monitoring. The company has already shown progress in reaching the second stage of its strategy, as it was awarded the first and only FDA-approved home non-invasive ventilation device for treatment of patients with third and fourth degree chronic structive pulmonary disease (COPD). It is notable that besides its strong product mix, ResMed also owns a very strong portfolio of patents to support and protect each one of them from competitors. Even more, it has recently decided to aggressively pursue those who are infringing them.
The company is also aware that its ability to sell non-invase treatment products relies largely on the willingness of third parties to pay for treatment. Therefore, it not only focuses on developing devices to treat sleep apnea and other respiratory problem. It also does on increasing awareness among patients and healthcare professionals of the potentially serious health consequences of untreated SDB as well as educating caregivers about therapy options. It is estimated that SDB affects 20 percent of the adult population and that 90 percent who have obstructed sleep apnea (OSA) still are and most likely will remain undiagnosed and untreated. The company has therefore created a number of foundations and funds primary care physician programs to educate doctors on SDB. On the other hand, diagnosed COPD patients in America are around 12 million people, but is is estimated that another 12 milion may have the disease and hasn't been diagnosed yet. Also, ResMed looks forward to capture those patients who formerly balked at costly, uncomfortable testing in a sleep lad through at-home sleep apnea testing. What this all really means actually, is that ResMed's potential markets have not really been penetrated and that the growth prospects for the coming years is huge.
On top of that, ResMed's expansion strategy not only includes and agressive drive to develop new products and penetrate new market segments, as well as raising awareness, but it also has in mind geographic expansion. Currently, the company generates around half of its sales in the United States, while Europe, Japan and Australia account primarily for the other half. All in all, ResMed markets its products in around 100 countries through sleep clinics, home health care and third parties. Now, it has recently undertaken several adquisitions mainly in Europe and is expecting the regulatory approval of its Stellar product in Brazil, all this as part of its "global emerging market strategy".
Â
A safe bet
ResMed remains and is likely to continue to be one of the key leaders of sleep apnea treatment. Thanks to is innovative capabilities and solid strategy, the company is expected to deliver solid returns in the long run -5 to 10 years.
| Â | ResMed Inc. | Industry Median | West Pharmaceutical Services Inc. (WST, Financial) |
|---|---|---|---|
| P/E | 20.00 | 25.30 | 30.80 |
| Market Capital | 6.2 b | - | 3.33 b |
| ROE | 19.10 | 7.10 | 11.10 |
Â
Jim Simmons and Jeremy Grantham (Trades, Portfolio) have seen the opportunity to get a good sleep by placing their bets on this company. Trading at a discount price, with really high returns on assets as compared to the industry, plus having in mind its strong financials and its growth opportunities, no wonder they did. Make sure you don't go to bed before doing so as well.
Â
Disclosure: Damian Illia holds no position in any stocks mentioned.
