How High Will ResMed Stock Go?

ResMed (NYSE:RMD) isn’t a very well-known company to the ordinary investor but it’s got more than 5,500 patents and designs for medical devices and solutions related to sleep apnea and respiratory care.

Those assets form an extensive intellectual property portfolio that have resulted in a competitive edge for this medical devices maker.

Indeed ResMed is no ordinary MedDevice firm, it’s a global leader in treating and managing respiratory disorders.  The company makes its money via two primary segments: Sleep and Respiratory Care and Software as a Service (SaaS).

And with with a 5-year revenue CAGR of 10.4%, it’s no surprise that shares are up by almost 2x over that time frame, but what’s left in the fuel tank to drive it higher, and how high can it go?

The Opportunity For RedMed Is Huge

One of the reasons investors got behind ResMed early on is the sleep apnea devices market alone is projected to reach $10.7 billion by 2027, growing at a CAGR of 8.1%. That translates to a global sleep apnea devices market size of $10.7 billion by 2027.

Yet ResMed isn’t confined to medical devices alone and has a significant presence in cloud-computing and therefore SaaS, which includes software solutions for home medical equipment providers, home health agencies, and senior living facilities.

With a large opportunity ahead of it and operating in two highly successful segments, ResMed has built a strong brand in the sleep and respiratory care industry. It’s been especially successful in developing high-quality products and is known for its patient-centric approach. That in turn has translated to a global distribution network with operations in over 140 countries.

How Is ResMed Looking Under The Hood?

Over the past 12 quarters, revenue growth year-over-year has been positive in every single quarter. For the fiscal year 2023, the company reported revenue of $3.6 billion, up 9% year-over-year. Last quarter, top line growth slowed to 7.2%, the slowest since 2022.

One reason revenues have been no the rise too is the company has been acquisitive. For example, the acquisition of MatrixCare, a leading provider of post-acute care software solutions, support ResMed’s SaaS offerings and expand its revenue streams.

So too expanding its presence in emerging markets where sleep disorders and respiratory diseases are rising opens up geographic diversification opportunities and supports the company’s long-term potential.

This growth is largely attributable to strong demand for its sleep and respiratory care products and the expanding SaaS business. In fact, that SaaS business has been crucial to high gross margins of 58.2% and an operating margins of 24.3% for FY2023.

They also have translated to solid earnings per share, which have been steadily growing. For the last fiscal year, the company reported an EPS of $4.90, translating to a 12% increase year-over-year.

There is lots to like for income investors too. The dividend has been raised for 12 consecutive years and sits at 0.99% currently with a payout ratio of 28.8%.

How High Will ResMed Stock Go?

ResMed stock has the potential to rise to as high as $220 per share based on the consensus of 11 analysts. Interestingly, sentiment among Wall Street researchers is shifting positive with six analysts revising their earnings estimates higher for the upcoming period.

Analysts are expecting ResMed profitability to remain in tact this year and what leaps off the page when looking at forecasts is how net income is projected to pop by as much as 15% annually over the next 5 years. That is particularly notable given that revenues are only expected to rise by 7.8% annually over the next half decade.

Overall, the company is highly profitable with almost $1 billion in net income annually on just $4.5 billion in revenues.

While the profit-and-loss statement does look really good, the balance sheet is a little less sturdy with cash and equivalents of $237 million while the debt levels are closer to $997 billion.

The Bottom Line

ResMed has a really strong business model and the valuation forecasts of analysts suggest good upside opportunity. 

With a price-to-earnings ratio of 29.8x, the valuation seems a little lofty on an earnings multiple basis however the net income forecast of 15% annually for the next 5 years would translate to that P/E multiple halving within that time frame. That makes the current valuation very reasonable on a multiples basis.

Another strong reason to consider ResMed is that the company has not reported a single down quarter in revenues on a year-over-year basis for the past 12 quarters. That shows a really strong business model that has the potential to expand internationally too.

The bottom line is ResMed has A+ profitability, good revenue growth, a solid balance sheet, and many growth levers to drive future share price appreciation over the next half decade.

If you’re looking for a stock that may meet many of Warren Buffett’s criteria, this would be it. It’s got reasonable ratios of R&D and SG&A relative to revenues, high returns on invested capital of 17.1% and returns on equity of 22.3%. No matter where you look it’s hard to find reasons why ResMed isn’t a strong buy for the long-term investor.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.