Here’s why ResMed Inc. shares just hit a record high on its full year results

Tom Richardson | July 26, 2019 |More on: COHCSLRMD

The ResMed Inc.(ASX: RMD) share price hit a record high of $18.44 this morning after the San Diego-based healthcare group reported an adjusted or ‘non-GAAP’ profit of US$121 million on revenue of US$705 million for the quarter ending June 30, 2019.

The sleep treatment company also hiked its quarterly dividend 5% to US39 cents per share on earnings of US95 cents per that were ahead of analysts’ expectations for earnings around US91 cents per share.

Australian investors can buy chess depositary instruments (CDI) in ResMed on the ASX that represent a 1/10th interest in the firm’s primary NYSE listing.

As such metrics like the US39 cents per share dividend payment need to be divided by 10 then FX-adjusted to work out what an Australian CDI holder would receive in equivalent cash.

“We delivered another quarter of operating leverage, which gives us flexibility as we execute on our long-term strategy to provide innovative products, software, and solutions to improve health outcomes, create efficiencies, and reduce overall healthcare system costs. Our pipeline is solid; we are well-positioned as we enter fiscal year 2020 on a trajectory to improve 250 million lives in out-of-hospital healthcare in 2025,” commented Mick Farrell, ResMed’s CEO.

Notably the company lifted its gross profit margin 1.2% to 59% over the quarter in a strong result sure to impress analysts with a fixation on margins at these kind of medical device businesses. Generally rising margins are a buy signal on competitive strength, while falling margins tend to represent competitive pressure, downsizing, and potential trouble ahead that equals a sell signal.

Generally then which way margins are heading can give investors a good read as to the overall health of a medical device business.

In fairness though a decent part of the margin growth is related to ResMed’s recent acquisitions of very high gross profit margins software-as-a-service (SaaS) businesses such as MatrixCare and Brightree.

In total the group more than doubled SaaS revenue over the year and flagged a strong performance from its Brightree acquisition.

Its ebullient CEO remains confident on the long term future of the business and it’s not hard to see why. It now has a valuation around US$18 billion (A$26b) and is far larger than well known healthcare rival Cochlear Ltd(ASX: COH), but still miles off A$103 billion giant CSL Limited(ASX: CSL).

I continue to remain positive on the outlook for ResMed and am not surprised to see the stock getting bid to a record high this morning.