Morningstar Event AnalysisResMed Earnings: Strong Device Sales...

Morningstar Event Analysis

ResMed Earnings: Strong Device Sales and Cost Control Boost Earnings

We maintain our USD 258 fair value estimate for narrow-moat ResMed, or AUD 39 per CDI at current exchange rates, following second-quarter fiscal 2024 results. Despite significant market pessimism given the growing prevalence of GLP-1 drugs for weight loss, underlying EBIT grew 15% to USD 366 million sequentially on first-quarter fiscal 2024, with sales up 5% and the underlying EBIT margin expanding roughly 250 basis points to 31%. Our long-term estimates are broadly unchanged, but we increase our fiscal 2024 underlying EBIT forecast by 2% to USD 1.4 billion. This was largely due to expenses tracking slightly below our expectations, as well as strong performances in ResMed's software-as-a-service business and device sales outside the Americas, up 16% in constant currency on the previous corresponding period.

Shares remain materially undervalued. Improving patient flow and availability of devices continue to support strong sales. We also anticipate margin expansion as ResMed's sales mix shifts to higher-margin masks, and cost inefficiencies of simultaneously ceasing production of its older AirSense 10 devices. Our midcycle 34% EBIT margin forecast is unchanged. The second-quarter gross margin expanded 90 basis points sequentially to 57% versus the first quarter, driven by product price increases and reduced freight costs. In addition, selling, general, and administrative expenses and research and development expenses decreased to 19.1% and 6.4% of revenue in the second quarter versus 20.2% and 6.9% in the first quarter, respectively. This is largely a result of the firm reducing its global workforce by 5% in October 2023, largely in noncore SG&A activities, and instead planning to invest more in product innovation and increasing brand awareness. We think this a sound strategy to help further penetrate the market.

Valuation: $39.00