It is still time to buy - nothing has changedFrom Barrons..By...

It is still time to buy - nothing has changed
From Barrons..

By Jacob Sonenshine

Shares of ResMed, a maker of CPAP and other sleep-apnea airway machines, have dropped because of new GLP-1 developments. It's an overreaction -- and the stock is a buy.

Shares are down 10% to $191 since Friday June 21, just before Eli Lilly released data showing that its Zepbound weight-loss treatment reduced obstructive sleep apnea severity by up to 62.8%. Patients who received the treatment in the trial said they had no longer had sleep apnea.

The worry is that this could threaten sales of Resmed's masks and flow generators, which comprise the vast majority of its $4.7 billion of revenue analysts expect this year, according to FactSet.

That worry is entirely overblown. Several companies have been selling GLP-1s at scale for a while, and demand for Resmed'sproducts have not taken any visible hit. Sales for the March-ended fiscal third quarter rose 7% to $1.19 billion from a year ago, the same type of moderate growth the company has enjoyed for years.

Plus, GLP-1s could even help the business. ResMed management argued on the earnings call that GLP-1s could trigger more people to take up the company's products. It said recent data show that current GLP-1 patients are 10.5% more likely to start positive airway therapy versus people not prescribed a GLP-1.

"Most doctors would say that a combination of CPAP and GLP-1s would be appropriate for a patient that presents with both sleep apnea and obesity," says Ponraj, Morningstar analyst. "We don't see GLP-1s shrinking the market."

That thesis, if it proves true over next few earnings reports, would send the stock back up to where it traded before the Zepbound data. Such a rebound has precedent; Dexcom, which makes continuous-glucose-monitoring devices for diabetics, saw its stock recover from an October low after earnings showed that weight-loss products weren't damaging the business. Intuitive Surgical, which makes machines used for bariatric surgeries, has seen its stock recover, and even recently hit new highs.

Beyond the short term, growth can keep coming because almost 1 billion adults worldwide currently have obstructive sleep apnea, according to The National Council on Aging. In addition, there are factors beyond body weight that cause the condition. So ResMed can grow for years to come, since it currently sells to just tens of millions of people. It competes with other makers of similar devices and surgical procedures, but historically, it has competed well, partly because Resmed's products cost hundreds of dollars but last months to years for some versions.

That's why sales can maintain a high single-digit-percentage annual growth rate for the long term. Analysts see revenue reaching close to $6 billion by 2026. As long as expenses such as product research and marketing don't balloon, profit margins can inch higher and earnings can grow faster than sales. Plus, the company often repurchases shares with its nearly $1 billion in yearly free cash flow -- and growing -- so per share earnings can grow in the double digits to almost $10 by 2026.

That can spark sustainable stock gains. If ResMed shares reclaim their 24.4 times forward-12-months price/earnings multiple from just before Lilly's data, they'd trade at $242 by the end of 2025, given the consensus earnings forecast for 2026. That's more than 25% upside in the stock from here.

Investors can breathe easier by picking up ResMed stock now.

Write to Jacob Sonenshine at [email protected]

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June 27, 2024 12:01 ET (16:01 GMT)

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