Monday, October 12, 1998
ResMed Inc.
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Phone: 619-689-2400
Website: http://www.resmed.com
Price (10/9/98): $45 1/8
HOW DID IT DOUBLE?
Even if market jitters aren't keeping you awake at night, there's nothing like a little R.E.M. to make you feel better. With ResMed in your portfolio, and maybe even one of its sleep apnea treatment devices at home, you could rest easy enough to kick back with some rapid eye movement sleep.
That's because this medical device maker has snoozed to a five-bagger over the last couple of years and a double since last fall thanks to terrific U.S. sales and economies of scale.
ResMed makes "air splints," that is, masks that connect to air flow generators to provide continuous positive airway pressure (CPAP) to keep the nasal passage open so a patient sleeps soundly. But a patient has to wear the product every night, so it's got to be comfortable. Innovations in recent years, including bi-level flow generators, which offer different pressure for inhalation and exhalation, have helped.
About 100,000 new U.S. patients were prescribed CPAP treatment in FY98. With ResMed enjoying its share of that growth, U.S. sales exploded 61% to $34.3 million, as overall revenues climbed 35%. With strong sales of pricier bi-level products, such as the Sullivan VPAP II ST, and a 21% devaluation of the Australian dollar cutting manufacturing expenses, gross margins rose from 58.7% to 65.3% even as operating expenses fell.
Earnings per share landed in dreamland, up 38% for the year ended June 30 and 43% for the fourth quarter. Earnings have shot up 124% since FY96. Such strong numbers plus the 2-for-1 stock split announced September 23 have produced continuous positive airflow beneath ResMed's stock.
BUSINESS DESCRIPTION
Based in San Diego, ResMed designs, manufactures, and distributes medical devices to treat and diagnose sleep disorders, including obstructive sleep apnea (closure of the upper nasal airway) and other respiratory conditions.
The U.S. market accounts for 52% of sales (up from 43% in FY97), while Europe (35%) and Australia and other countries (13%) make up the balance. Sales of flow generators that keep a patient's airways open account for two-thirds of revenues, while the rest comes from mask systems and related accessories.
The company is constructing a new manufacturing facility in Australia that should be completed by early calendar 1999 at a cost of $9 million.
Competitors include Respironics <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: RESP)") else Response.Write("(Nasdaq: RESP)") end if %>, DeVilbiss, a division of Sunrise Medical <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: SMD)") else Response.Write("(NYSE: SMD)") end if %>, and Nellcor Puritan Bennett, a subsidiary of Mallinckrodt <% if gsSubBrand = "aolsnapshot" then Response.Write("(NYSE: MKG)") else Response.Write("(NYSE: MKG)") end if %>. Insiders own 12% of the stock, with most held by Chair/CEO Peter Farrell. The stock split becomes effective around November 6.
FINANCIAL FACTS
Income Statement
12-month sales: $66.5 million
12-month income: $10.6 million
12-month EPS: $1.41
Profit Margin: 16%
Market Cap: $338.9 million
Balance Sheet
Cash: $20.7 million
Current Assets: $46.6 million
Current Liabilities: $13.8 million
Long-term Debt: None
Ratios
Price-to-earnings: 32
Price-to-sales: 5.1
HOW COULD YOU HAVE FOUND THIS DOUBLE?
Sleep apnea and related problems can cause a temporary lack of oxygen that disrupts one's sleep by forcing one to gasp for air. The result can be chronic fatigue and irritability that affects everything from job performance to sexual function. A 1993 congressional report said that 20 million Americans suffer from sleep apnea, with about 6.5 million over 30 years of age experiencing moderate to severe troubles. Yet less than 3% of such folks have been properly diagnosed.
ResMed's own fortunes have tracked the growing recognition of this market. For the year ending June 30, 1997, earnings increased 62% on 42% revenue growth. But the company traded at just 23 times trailing earnings at the time. Since it went public in June 1995, ResMed has appeared periodically on the rising margins and beat estimates screens in the Foolish Workshop.
You also might have found ResMed if you investigated Respironics, which last year acquired Healthdyne Technologies after that company fought off an unwelcome takeover bid in a highly publicized battle that spotlighted the market for medical device makers treating sleep disorders.
WHERE TO FROM HERE?
Zacks shows consensus earnings estimates of $1.78 a share for FY99 and $2.19 for FY00. That suggests 24% compound annual growth for the next two years, slightly below the 26% long-time projections. ResMed carries a PEG value of about 1.4, suggesting that it may be pricey.
On the other hand, ResMed has modestly beaten estimates for several quarters now and recent results have been exceptional. That's especially true because the company suffered foreign currency losses of $4 million in 1998 after enjoying gains of $1.6 million in the prior year. Barring that swing, ResMed's earnings would have been eye-popping.
The firm has also increased its reach by acquiring distributors in Germany, France, and Singapore over the last two years and by signing a deal more recently with Invacare <% if gsSubBrand = "aolsnapshot" then Response.Write("(Nasdaq: IVCR)") else Response.Write("(Nasdaq: IVCR)") end if %> to distribute its products in the U.S. In addition, the Food and Drug Administration in June cleared its VPAP device for use by patients with various lung diseases. In August, the FDA cleared VPAP for use in hospital critical care units.
However, there are two potentially worrisome matters. First, accounts receivable as of June 30 were up 63% year-over-year despite the fact that fourth quarter sales increased just 38%. Plus the allowance for doubtful accounts actually fell in real dollars.
Also, ResMed has been engaged in various patent squabbles with Respironics, both here and in Australia. An Australian patent on the CPAP method was revoked in 1994, with ResMed subsequently losing market share "down under." Thus far, U.S. courts have also found against ResMed's contentions that Respironics' products infringe on the company's patents. The courts are still reviewing this and other matters.
Regardless of how material these legal disputes prove to be, they do reinforce the fact that ResMed has some tough and much larger competition.
-- Louis Corrigan
([email protected])