Revolutionizing Sleep Health, Wearables, Digital Innovation, And Global Expansion Propel Growth

Key Takeaways

• Increased diagnosis of sleep apnea and consumer tech advancements in sleep tracking drive demand for ResMed's products, enhancing device sales and revenue.
  
• Focus on digital health and data analytics through AI improves patient outcomes and reduces costs, fostering market penetration and revenue growth.
  
• ResMed faces challenges like increased freight costs, dependence on digital health growth, diverse investment in therapies, and innovation risks in the mask and accessory business affecting profitability and revenue growth.

Catalysts

Develops, manufactures, distributes, and markets medical devices and cloud-based software applications for the healthcare markets.

• Increased awareness and diagnosis of sleep apnea driven by media interest and consumer technology advancements, including wearables capable of sleep tracking and elevated focus from pharmaceutical companies on sleep-related health issues, positively impacting demand for ResMed's solutions. This can increase the volume of devices sold, subsequently growing revenue.
  
• Strong growth in masks and accessories business, supported by new mask innovation and expansion of resupply programs, especially in the U.S., leveraging digital health ecosystems such as AirView for physicians and myAir for patients. This directly enhances revenue growth from higher-margin products.
  
• Investment in and focus on digital health and data analytics, leveraging a vast repository of medical data to drive innovation, improve patient outcomes, and reduce healthcare costs. The utilization of AI and machine learning in product and service enhancement can lead to increased market penetration and revenue growth.
  
• Expansion of production and global availability of market-leading device platforms like the AirSense 11, alongside securing regulatory clearances in new markets. This operational focus aims to meet burgeoning global demand, escalating device sales, and expanding the company's global footprint, thus contributing to revenue growth.
  
• Execution of demand generation initiatives and development of pathways for patient screening, diagnosis, and treatment, particularly in underserved markets. This strategy aims to increase the market penetration of sleep apnea and respiratory care solutions, driving long-term revenue and net operating profit growth through a broader user base.

Assumptions

• Analysts are assuming ResMed's revenue will grow by 6.9% annually over the next 3 years.
• Analysts assume that profit margins will increase from 21.8% today to 27.1% in 3 years time.
• Analysts expect earnings to reach $1.6 billion (and earnings per share of $10.38) by about August 2027, up from $1.0 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 26.3x on those 2027 earnings, down from 30.4x today. This future PE is lower than the current PE for the AU Medical Equipment industry at 35.6x.
• Analysts expect the number of shares outstanding to decline by 0.09% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.32%, as per the Simply Wall St company report.

Risks

• The projected increase in freight costs could negatively impact ResMed's gross margin in fiscal year 2025, potentially affecting its profitability.
  
• Dependence on the ongoing successful penetration and growth of the digital health market, with specific reference to leveraging data analytics and AI capabilities, could lead to increased R&D and operational expenses impacting net margins.
  
• ResMed's strategy to mitigate patient drop-off through pharmaceutical and alternative therapy investments like Apnimed and hypoglossal nerve stimulation technology indicates a need to diversify treatment options, which could dilute focus and investment in their core PAP technology segment, potentially affecting revenue from their primary income stream.
  
• Though ResMed is expanding its mask and accessory business, the reliance on the continued success and adoption of new products such as the AirFit F40 in competitive global markets introduces a risk if these innovations do not meet market demand or face competition, impacting revenue growth.
  
• The anticipated impact of freight cost headwinds on gross margin suggests operational inefficiencies or increased cost pressures could reduce overall financial performance, particularly affecting net income growth.

Valuation

• The analysts have a consensus price target of $232.83 for ResMed based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $264.0, and the most bearish reporting a price target of just $200.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $5.7 billion, earnings will come to $1.6 billion, and it would be trading on a PE ratio of 26.3x, assuming you use a discount rate of 6.3%.
  
• Given the current share price of $210.94, the analyst's price target of $232.83 is 9.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.