Here's Why You Should Hold on to ResMed (RMD) Stock for Now

ResMed Inc. RMD is gaining from robust segmental and international growth. Strong ventilators and mask sales along with emphasis on product development and international markets is expected to contribute further. However, stiff competitive and reimbursement headwinds persist.

Over the past year, the Zacks Rank #3 (Hold) stock has outperformed its industry. The stock has gained 52.2% against an 8.8% fall of the industry and a 7.6% rise of the S&P 500.

The renowned designer, manufacturer and distributor of medical devices and cloud-based software solutions to manage respiratory disorders has a market capitalization of $26.31 billion. The company projects 14% growth for the next five years and expects to maintain strong segmental performance. Further, it has a positive earnings surprise of 14.7%, on average, for the trailing four quarters.

Let’s discuss

Critical Care Products’ Demand Robust: ResMed is scaling up production of ventilators, masks and other respiratory devices since March in response to higher demand for its critical care products during the third quarter of fiscal 2020.

Currently, the company is facing a surge in demand for ventilators such as Astral, Stellar, Lumis as well as non-invasive ventilators like AirCurve, Flexo and the GA across geographies. A cloud-based remote monitoring software for ventilators and Lumis bilevel devices was recently launched across Europe via its AirView platform.

Strong Emphasis on Product Development: ResMed’s activities related to product development instil optimism. It’s first tube-up full face CPAP mask AirFit F30i, introduced in January, is currently available in the United States, Canada and across majority of Europe and will later be rolled out in other countries.

The company also expanded its AirFit mask portfolio with the introduction of the world’s first tube-down nasal cradle CPAP mask with a front-facing tube, AirFit N30, in the United States. It will later be available in other countries as well. The company is also progressing with its flagship masks — the AirFit F20, the AirFit N20 and AirFit N30.

Q3 Results Impressive: ResMed’s impressive third-quarter fiscal 2020 results buoy optimism. The company’s growth across both its key operating segments at constant exchange rate was impressive. Robust geographic revenue growth primarily resulted from strong performance of its mask and device product portfolios on increased demand for ventilators and ventilator masks.

Continued momentum in the Brightree service portfolio and additional contribution from the MatrixCare buyout boosted global revenues from SaaS in the quarter under review.

Downsides

Stiff Competition: ResMed operates in a highly competitive market for its sleep-disordered breathing products with respect to product price, features and reliability. The competition ranges from biggies like Philips BV as well as regional manufacturers. Some of ResMed’s competitors, such as Löwenstein Medical GmbH + Co. KG, are affiliates of its customers. This makes it difficult for the company to compete with them.

Reimbursement Headwind: ResMed’s ability to sell products primarily depends on the extent to which coverage and reimbursement for its products will be available from government health administration authorities, private health insurers and other organizations. These third-party payers are increasingly challenging the prices charged for medical products and services and can deny coverage for treatments that may include the use of its products.

Estimate Trend

ResMed is witnessing a positive estimate revision trend for 2020. In the past 60 days, the Zacks Consensus Estimate for its earnings has moved 9.2% north to $4.49.

The Zacks Consensus Estimate for the company’s fourth-quarter fiscal 2020 revenues is pegged at $710.9 million, which suggests a 0.9% rise from the year-ago quarter’s reported number.

Key Picks

Some better-ranked stocks from the broader medical space are Quest Diagnostics Incorporated DGX, Hologic, Inc. HOLX and QIAGEN N.V. QGEN.

Quest Diagnostics’ long-term earnings growth rate is projected at 7.6%. It currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Hologic’s long-term earnings growth rate is estimated at 7%. The company presently has a Zacks Rank #2.

QIAGEN’s long-term earnings growth rate is estimated at 12.2%. It currently sports a Zacks Rank #1.

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