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Here's Why You Should Hold on to ResMed (RMD) Stock for Now

Zacks Equity Research

ResMed Inc.’s RMD Software-as-a-Service (SaaS) business continues to gain from steady growth in Brightree service offerings and incremental contribution from the buyouts of MatrixCare and HEALTHCAREfirst.

Over the past month, the stock has outperformed its industry. The stock has gained 15.8% in comparison with the industry’s 3.6% rise and the S&P 500’s 2.6% drop.

This leading designer, manufacturer, as well as global distributor of generators, masks, and related accessories for the treatment of sleep-disordered breathing and other respiratory disorders has a market cap of $16.17 billion.

This Zacks Rank #3 (Hold) company has solid prospects which makes it worth the wait for now.

What’s Working in Favor of the Stock?

ResMed had identified three horizons for growth viz, focus on core sleep apnea franchise, drive growth in adjacent product and geographic markets and discover opportunities in new markets.

Progress in Sleep Apnea Franchise: In terms of progress in the first horizon, which focuses on ResMed’s core sleep apnea franchise, the company has been providing digital health and connected care solutions using advanced technology. The company now has more than 10 million patients being monitored with the AirView software. Also, over 9 million patients are now monitored by fully cloud-connected medical devices on their bedside tables. ResMed has been seeing solid uptake of the AirSense 10 device platform and the Air Solutions cloud-based software ecosystem.

Growth in Adjacent Product and Geographic Markets: The second horizon deals with growth in adjacent product and geographic markets. This includes homecare ventilation for  Chronic Obstructive Pulmonary Disease , Amyotrophic Lateral Sclerosis and other respiratory disorders in emerging markets in China, India and Brazil. For progress in this horizon, management believes that the spectrum of cloud-connected respiratory care products in ResMed’s portfolio will play a big role in reducing costs and improving outcome.

Opportunities in New Markets: The third horizon refers to a portfolio of opportunities in new markets, including clinical treatments of atrial fibrillation, heart failure with preserved ejection fraction, asthma, chronic disease management. Another key area of this horizon is ResMed’s work on chronic disease management algorithms, including population health models, health care analytics, care co-ordination and SaaS models for home health, home nursing and hospice. In this area, the company is recording steady growth in Brightree service offerings and incremental contribution from the buyouts of MatrixCare and HEALTHCAREfirst.

Buyouts to Boost SaaS Business: ResMed has been continuously opting for buyouts to boost revenues from SaaS business. According to the company, this niche is booming with prospects and has a total addressable market of more than $1.5 billion in the United States alone. Leveraging on the company’s leading position in multiple SaaS verticals, ResMed expects its SaaS portfolio to move from high single-digit pro forma growth to low double-digit pro forma growth over the medium term.  This growth trajectory is expected to sustain over the long-term.

In the last-reported quarter, the company witnessed a 101% rise in revenues from the SaaS business on continued expansion of Brightree and HEALTHCAREfirst along with the first full-quarter contribution from the acquisition of MatrixCare.

Expansion in International Markets: ResMed continues to invest and expand in high-growth markets like China, South Korea, India, Brazil and many Eastern Europe countries. In each of these regions, the company is implementing long-term strategies to improve quality of patient life for the purpose of delivering better patient outcome and reduce overall system healthcare costs in each country.

Increased focus on Product Development: In order to maintain its leadership position in the Sleep-Disordered Breathing (SDB) market and to expand its sales base, ResMed is focusing on product development and innovation. In this regard, the company recently expanded its AirFit mask portfolio with the introduction of its first top-of-head-connected nasal CPAP mask, AirFit N30i, in the United States.


However, there are a few factors which are working against the stock as well.

Reimbursement Headwind: ResMed’s ability to sell products largely depends on the extent to which coverage and reimbursement for the products are available from government health administration authorities, private health insurers and other organizations.

Competitive Landscape: The market for SDB products is highly competitive with respect to product price, features and reliability. ResMed’s primary competitors include Philips BV, DeVilbiss Healthcare, Fisher & Paykel Healthcare Corporation Limited, Apex Medical Corporation, BMC Medical Co. Ltd. and regional manufacturers.

Challenging Macroeconomic Scenario: Pricing pressure in the United States and Europe has been an issue over the past few quarters.

Which Way Are Estimates Treading?

For the fiscal fourth quarter, the Zacks Consensus Estimate for earnings is pegged at 92 cents, indicating a year-over-year decline of 3.2%. The same for revenues stands at $700.6 million, suggesting a 12.3% improvement.

For fiscal 2019, the Zacks Consensus Estimate for earnings is at $3.63, calling for 2.8% year-over-year growth. The same for revenues stands at $2.60 billion, indicating a rise of 11.2%.

Key Picks

A few better-ranked stocks in the broader medical space are Masimo Corporation MASI, CONMED Corporation CNMD and DENTSPLY SIRONA Inc. XRAY, each currently carrying a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Masimo’s long-term earnings growth rate is projected at 16.1%

CONMED’s long-term earnings growth rate is expected at 13.3%.

DENTSPLY SIRONA’s long-term earnings growth rate is predicted at 11.5%.

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