HOLD ResMed

The Intelligent Investor Graham Witcomb

Technologies tend to get cheaper over time, and that goes for assisted breathing technologies too. We’ve lost track of how many ResMed results have included the line “gross margin was slightly lower than the prior year quarter mainly due to declines in average selling prices, which were partially offset by manufacturing and procurement efficiencies”. The company’s gross margin fell slightly from 58.4% to 58.3% in the three months to September, compared with the previous year.

This tells us that ResMed is pretty good at cutting operating costs and taking advantage of operating leverage, with net profit margin slightly better today than it was 10 years ago, despite gross margin falling from 62% to 58%.

Revenue rose 13% to $US588 million ($810 million) in the September quarter, while net profit increased 23% to $US106 million due to administrative and research expens- es being relatively unchanged from last year.

This was a strong result, particularly because the growth was across all product categories and in all geographic markets. Sales were up 16% in Europe and Asia, compared with 10% growth in North and Latin America.

In this quarter, ResMed formed a joint venture with data analytics provider Verily and purchased Healthcarefirst for $US126 million. This partnership should support the company’s strategy of offering the best software for patients and providers, rather than driving sales solely by hardware improvements.

ResMed trades on a forward price-earnings ratio of 28 based on consensus estimates for 2019 earnings. We’re happy with the revenue and earnings growth this quarter and glad to see cost-cutting measures more than offsetting falling average selling prices. Graham Witcomb is an analyst at Intelligent Investor, owned by InvestSMART Group.