HOLD ResMed

The Intelligent Investor Graham Witcomb

The medical equipment supplier’s revenue growth slowed compared with last year but sales still increased 11% to $US1.2 billion ($1.65 billion) for the six months to December after removing the effects of currency fluctuations.

The company’s high-growth software-as-a-service business increased revenue by 44%. Software, however, accounts for only around 10% of sales.

ResMed’s real breadwinner is its continuous positive airway pressure (CPAP) device and masks business. Sales were decent in the US, Canada and Latin America, where revenue rose 9%. Unfortunately, European and Asian sales came to a standstill at the end of the year, with device sales falling 2% on a constant currency basis. Also, mostly due to a price battle with competitors, it’s ResMed’s fourth consecutive year of declines in average selling prices.

The combination of falling prices in the US and falling sales in Europe suggests a highly price-conscious customer base. Both factors support our theory that the recent acquisition of MatrixCare for $US750m reflected a desperation to grow the company.

ResMed is trying to establish a software footprint to make patient record keeping easier and help with analysis, in the hope doctors will be more inclined to recommend its devices over others.

Falling prices this half were offset by a drop in general and admin expenses as a proportion of revenue from 33% to 25% over the past 10 years, but a business can only cut so many costs before product quality declines.

The price guide is unchanged for now but a PE ratio in the high 20s is becoming harder to justify without clear signs that ResMed’s software strategy is supporting sales growth and selling prices. ResMed has now spent more than $2 billion pivoting to its software-as-aservice business over the past few years. Our recommendation remains HOLD.