ResMed (RMD) will help you sleep well at night, in more than one way. First, its nighttime breathing machines and masks provide tremendous help to millions of people who suffer from sleep apnea. Second, the stock has been a winner, going from $18 to $54 the past decade as profits increased every year at an average of 14% per year. The company has grown profits each year since 1997 and earnings are very predictable.
60% of ResMed’s $1.7 billion in annual revenue comes from flow generators and 40% is from masks and accessories. The company paid out 45% of profits to its dividend, which is higher than 2%, and management also buys back stock. All-in-all the company used 98% of free cash flow on dividends and buy-backs the last 5 years.
Ten Year Chart
Although there’s a lot to love about this stock, it also has its issues. Notably profit growth, has been below par last year and that’s expected to be the case again this year.
Issues include foreign exchange rates and lower profit margins due to declining average selling prices. Profit growth has been between 2% and 7% the past 4 qtrs and is expected to be 0% the next two qtrs.
Profit History
In addition to slow profit growth, the stock is selling for 20x earnings, which means RMD isn’t on sale. I think the stock is worth 20x when profits are growing around 15% a year, but the company is in the middle of a 8 qtr timeframe where profit growth is expected to average 3.5% a qtr. Yikes.
Sharek’s Take
ResMed is a worldwide leader in sleep apnea machines, and management does a tremendous job returning cash to shareholders in the form of stock buybacks and a healthy dividend. But at this juncture — with profit growth in the low single digits — the stock is just one to keep an eye on, not invest in.
View the One Year Chart here. View the Earnings Table here.
