rmd blog

Stock Analysis - Resmed Inc. (NASDAQ:RMD)

Continuing on with my analysis from my Rule #1 stock screen, next up is Resmed Inc which trades on the NASDAQ under the symbol RMD.

Company Profile:

From Yahoo Finance

ResMed, Inc. engages in the development, manufacture, and marketing of products for the screening, treatment, and long-term management of sleep-disordered breathing and other respiratory disorders.

Resmed Inc has a market capitalization of $3.19B.

Financial Analysis:

Let’s bring out the Big Five and put them on display!

Return on invested capital has been fairly consistent over the last 6 years. The 5 year average is 11.40%. Although this does meet our Rule #1 minimum, it is a much lower ROIC than the first years which were in the 20%+ range. This is disappointing and is a concern.

Resmed Inc only has total debt of 11% of capital. So the return on equity mimics the ROIC very closely. The 10 year average ROE is 18.47% while the 5 year average ROE is 15.27% and declining to last year’s ROE of 12.61%.

Now, the equity growth rate has been absolutely outstanding over the last 10 years! The average growth rate over the whole period is a whopping 33.98%! The 5 year average is more amazing at 40.01% and last year’s equity growth rate was 44.05%.

And the earnings per share growth rate has kept up fairly well to that torrid equity growth rate. Over the 10 year period, the EPS growth rate has been 27.93%. Over 5 years, it has been 23.05%. And last year’s EPS growth rate was 20.59%. Fantastic numbers - and very consistent.

Sales growth rates have been stellar and consistent as well at 31.5% over the 10 year period.

Cash flow growth rates have been excellent as well although you can see a decline in the growth rates. Over 10 years, the growth rate was 28.43%. It declines slightly to 25.45% over 5 years and declines to 20.05% last year.

From the fundamentals, this one is tough. The ROIC worries me and turns me off. But the equity growth and the EPS growth rate are absolutely beautiful.

Stock Analysis:

Like the previous stock Fastenal Co., RMD has had a very narrow P/E over the last 10 years. And it is currently at the bottom end of that P/E at 29.75. I will use that conservative number as my future P/E.

My initial estimate for the EPS growth rate comes from looking at the historical equity growth rate which has been phenomenal. The most conservative equity growth rate is over the 10 year period at 33.98%. That is a very high EPS growth rate to project 10 years into the future!

The analysts have a more reasonable 20% future EPS growth rate. Let’s go with their more conservative number.

With this information, I derive a sticker price of $62.83. For 50 cents on the dollar, my MOS price is $31.41. At the current price of $41.05, there is currently a discount of almost 35% on the sticker price! Unfortunately, there is also a 30.68% premium on the MOS price.

Compare your calculations with mine.

And here is the stock price chart for Resmed Inc.

Price chart for Resmed Inc

Wow. Resmed Inc has experienced quite the drop over the last 3 months from the $51 range to the current $41. It seems that back in April, Resmed Inc had to recall 300,000 of its premier device, the S8 Flow Generator, from the US, Europe and the Asia-Pacific after reports that several of the units had short-circuited.

Conclusion:

Other than the ROIC (which is definitely a concern), this stock would definitely be a Rule #1 stock. But the ROIC is important. Although it does meet the minimum and his been stable over the last 6 years, it still gnaws at me.

As for the recall, the CEO Peter Farrel says ” The share price will come back. We’ve had 48 quarters of growth on the trot.”

What do you think? Is this a chance to get a great company at a good price?