Is Resmed a Buy?

Resmed (NYSE: RMD) launched the first continuous positive airway pressure (CPAP) machines a few decades ago and has helped millions of sleep apnea patients to get a good night's rest. Long-term shareholders have been hugely rewarded for holding on to this steady-Eddie business.

In this episode of The Motley Fool's Industry Focus: Healthcare, host Shannon Jones and Fool.com contributor Brian Feroldi discuss Resmed's business model, financial results, and future prospects.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. A full transcript follows the clip.

This video was recorded on Aug. 7, 2019.

Shannon Jones: Next up we have ResMed, ticker RMD. Brian, this company is pretty interesting, too. It's a device maker, but it's also a software company, leading the way in digital healthcare management. Even competes with Inogen in some respects. What can you tell us about what ResMed does?

Brian Feroldi: ResMed has been around for several decades now. Their claim to fame is that they were the pioneers, they were the first to develop and launch, a continuous positive airway pressure machine, or CPAP for short. That's a device that I'm sure many of our listeners are familiar with, which is used to treat obstructive sleep apnea. Sleep apnea is when your mouth closes while you are asleep, and you literally stop breathing. A CPAP machine is a mask that you put directly over your mouth, and it creates a continuous positive airway pressure that's forced down your throat, and that keeps your lungs open all night long, so that way, you never interrupt your sleep or anything like that.

ResMed sells the machines themselves, as well as a whole host of accessories that goes with them -- masks, tubes, cleaning devices. They also recently are getting into the portable oxygen concentrator games, as you mentioned, to compete with Inogen. So, that is the bulk of their business. Those two are about 90% of their sales.

But over the last year, they've made some investments in the healthcare software market. They've bought out several different cloud-based providers, and they're now getting into the game. They want to create software that helps people to diagnose, manage and treat respiratory diseases like COPD and sleep apnea. They offer these software tools that can actually be downloaded at home that patients can use, that listens constantly to actually detect whether or not people have sleep apnea. And that is a great use of their capital because the sleep apnea market is enormous. I mean, almost a billion people worldwide have sleep apnea. The problem is, about 80% of them don't even know that they have it. So, by creating these tools that help to diagnose sleep apnea, they are, in a sense, building demand for their future products.

Jones: ResMed has this razor and blades model. It's not just the devices, but it's also the tubing and everything that comes with it, which I like about their business model. And thanks now to this software side that they've been investing in and growing, as you mentioned, Brian, now they're also seeing expanded margins moving forward. Holistically, how are we looking at financials right now for ResMed?

Feroldi: As I said, this company's been around for many years. They're much more a mature company than Inogen is. They're growing their top line at a high-single-digit, low-double-digit rate. They're steadily improving their margins by shifting over to more of a software platform. But they have been profitable and free cash flow for many, many years. In fact, they're actually a dividend payer. They've been paying a growing dividend for many years. This is definitely not a high-growth business by any means. But they do have a model in place that allows them to very consistently pump out steady top line growth and then use stock buybacks as well as margin enhancements to grow the bottom line at a slightly faster rate. Given the enormous potential for these guys as sleep apnea becomes more and more diagnosed, they have a really solid, steady-eddy business that can consistently grow at high-single-digit, low-double-digit rates for many, many years to come.

Jones: You talked about how CPAPs work. I think one of the bigger issues, and we probably all know someone who uses a CPAP machine, comes down to compliance. Because you have to wear this big, bulky mask, not exactly the sexiest object when you get in bed. But with that being said, compliance has been a huge issue. It's not just unattractive, but it's bulky and extremely uncomfortable. I've got an aunt that uses one. When you look out at the competitive landscape, there are other competitors -- one of which we'll get to in a second -- that are coming out with technology that's designed to be much less invasive, much less bulkier, and really a seamless experience. How do you see ResMed positioning itself for the future, especially with competition on its heels that are coming up with devices that are just simpler?

Feroldi: There's a couple of answers there. I would say the first is, these guys are the leader in their industry. They are the pioneers. They were the original developers of the CPAP machine. They have decades of experience designing these, and they are constantly rolling out new masks, new tubes, new devices that are smaller, that are quieter, that are more comfortable to wear, that fit a wide variety of face sizes and shapes. They're doing everything they can to make their devices as easy and as comfortable to use. Because, as you mentioned, compliance is a big issue here. In fact, one of the companies that we're going to talk about next is taking advantage of that big compliance issue. But, for the people that choose to use CPAP machines, I do think that ResMed has a defensible position in that they regularly spend heavily on R&D to make sure that their devices are the quietest, the safest, and the easiest to use, as well as the most comfortable.

Brian Feroldi has no position in any of the stocks mentioned. Shannon Jones has no position in any of the stocks mentioned. The Motley Fool recommends ResMed. The Motley Fool has a disclosure policy.

This article was originally published on Fool.com