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RMD Stock Study (8-9-23)

Posted by on September 16, 2023 at 06:17 | Last modified: August 9, 2023 15:42

I recently did a stock study on ResMed Inc. (RMD) with a closing price of $179.27.

M* writes:

     > ResMed is one of the largest respiratory care device companies
     > globally, primarily developing and supplying flow generators,
     > masks and accessories for the treatment of sleep apnea.
     > Increasing diagnosis of sleep apnea combined with ageing
     > populations and increasing prevalence of obesity is resulting
     > in a structurally growing market. The company earns roughly
     > two thirds of its revenue in the Americas and the balance
     > across other regions dominated by Europe, Japan and Australia.
     > Recent developments and acquisitions have focused on digital
     > health as ResMed is aiming to differentiate itself through
     > the provision of clinical data for use by the patient,
     > medical care advisor and payer in the out-of-hospital setting.

Over the past decade, this medium-size company has grown sales and earnings at annualized rates of 11.7% and 10.9%, respectively. Lines are mostly up, straight, and parallel except for rockiness in EPS (dips in ’17, ’18, and ’21). PTPM leads peer and industry averages while ranging from 19.9% in ’19 to 27.7% in ’14 with a last-5-year mean of 25.0%.

Also over the past decade, ROE leads peer and industry averages while ranging from 15.1% in ’18 to 27.4% in ’20 with a last-5-year mean of 22.2%. Debt-to-Capital is lower than the industry and roughly even with peers while increasing from 14.6% in ’14 to 27.7% in ’23 with a last-5-year mean of 28.6%.

Value Line rates the company A for Financial Strength and M* rates them “Exemplary” for Capital Allocation. Quick Ratio is 1.2.

With regard to sales growth:

I am forecasting near the bottom of the range at 7.0% per year.

With regard to EPS growth:

FY ends Jun 30, which creates some labeling conflict between data sources.

I am forecasting below the long-term estimate range [mean of six: 12.2%] at 9.0% per year. I will use ’23 EPS of $6.09/share as the initial value.

My Forecast High P/E is 30.0. Over the past decade, high P/E has trended up from 24.0 in ’14 to 40.7 in ’23 with a last-5-year mean of 52.7. The last-5-year-mean average P/E is 44.1. I am forecasting near the bottom of the range [only ’14 and ’16 (25.8) are lower].

My Forecast Low P/E is 23.0. Over the past decade, low P/E has trended up from 17.4 in ’14 to 33.2 in ’23 with a last-5-year mean of 35.6. My forecast would be the lowest value since 2016.

My Low Stock Price Forecast (LSPF) of $140.10 is default based on $6.09/share initial value. This is 21.8% less than the previous closing price and 21.4% less than the 52-week low.

Over the past decade, Payout Ratio decreases from 41.8% in ’14 to 28.9% in ’23 with a last-5-year mean of 39.6%. I am forecasting below the range at 28.0%.

These inputs land RMD in the HOLD zone with a U/D ratio of 2.0. Total Annualized Return (TAR) is 9.5%.

PAR (using Forecast Average—not High—P/E) is 6.9%, which is less than I seek for a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 159 studies done in the past 90 days (my study along with 48 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, Forecast Low P/E, and Payout Ratio are 10.0%, 10.0%, 40.0, 28.7, and 44.4%. I am lower across the board. Value Line’s future average annual P/E of 36.0 is higher than both MS (34.4) and mine (26.5).

MS high / low EPS are $9.30 / $4.90 vs. my $9.37 / $6.09 (per share). $4.90/share is less than both ’23 and ’22 EPS, which seems unreasonable to me. The median is $5.87, though. At $4.90/share, my EPS range is decisively higher, which somewhat offsets my lower P/E range. At $5.87, my EPS range is just a tinge higher and hardly worth mentioning.

MS LSPF of $152.80 implies a Forecast Low P/E of 31.2 vs. the above-stated 28.7. MS LSPF is 8.7% greater than the default $4.90/share * 28.7 = $140.63, which results in more aggressive zoning [at $5.87/share, MS LSPF is less than default thereby making for less aggressive zoning]. MS LSPF remains 9.1% greater than mine.

My TAR (over 15.0% preferred) is less than the 13.3% from MS.

MOS backing the current study seems robust.

I track a few different valuation metrics. PEG is 2.8 and 3.1 per Zacks and my projected P/E, respectively: both overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is undervalued at 0.69. Kim Butcher’s “quick and dirty DCF” prices the stock at 30.0 * [$11.15 – ($2.40 + $1.00)] = $232.50 thereby suggesting the stock to be undervalued by 23.0%

I would look to re-evaluate RMD under $175/share to see if TAR qualifies.

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