Here’s Why We Think ResMed Stock Is Undervalued After An 18% Fall In A Month

ResMed (NYSE: RMD), a medical equipment company, has seen an 18% fall in a month, underperforming the broader S&P500 index, up 1%. The recent fall can be attributed to its downbeat Q4 fiscal 2023 results (fiscal ends in June). The company reported revenues of $1.1 billion, up 23% y-o-y, aligning with the consensus estimate. However, its bottom line of $1.60 on a per share and adjusted basis fell short of the $1.67 consensus estimate. Gross margin contracted 200 bps during the quarter due to higher component and manufacturing costs.

Even if we look at the longer term, RTX stock is down 30% from levels seen in late 2021, faring worse than the S&P 500 index, down around 6%. This 30% fall for RMD stock since late 2021 can be attributed to 1. the company’s P/S ratio contracting 45% to 6.2x revenues vs. 11.9x in 2021, 2. a 1% rise in its total shares outstanding to 148 million, partly offset by 3. ResMed’s revenue growth of 31% to $4.2 billion over the last twelve months, compared to $3.2 billion in 2021. This has meant that the company’s revenue per share metric has risen 30% to $28.62 now, compared to $21.97 in 2021—our dashboard on Why ResMed Stock Moved has more details.

ResMed’s
RMD
sales have been driven by the company’s sleep and respiratory care products and the software as a service business (SaaS). The company’s SaaS business has benefited from its 2022 acquisition of Medifox Dan. The company will likely continue to benefit from an overall increase in sleep apnea diagnoses in the long run. Note that 30 million people are suffering from obstructive sleep apnea in the U.S. alone, of which 80% are undiagnosed. ^[1]

After an 18% sales growth in 2023, ResMed is poised for low double-digit sales growth to around $4.7 billion in 2024. The company’s operating margin of 26.8% in 2023 has seen a slight decline in recent years due to increased costs, but it remains above the 21.6% figure in 2019, before the pandemic. Our ResMed Operating Income Comparison dashboard has more details.

Lastly, looking at its stock price, ResMed seems undervalued. RMD stock, at its current level of $177, is trading at 6.2x revenues compared to its last five-year average of 9.4x, implying that the stock is undervalued. If RMD stock were to trade at its historical average P/S multiple of around 9x, it would result in levels north of $250, implying 40% gains. The average of analysts’ price estimates also places RMD stock at around $250. Overall, we believe that investors can use this current dip in RMD stock for solid gains in the long run.

What if you’re looking for a portfolio that aims for long-term growth? Here’s a value portfolio that’s done much better than the market since 2016.

Invest with Trefis Market Beating Portfolios

See all Trefis Price Estimates