RMD Stock Study (5-7-24)

Posted by Mark on May 22, 2024 at 07:07 | Last modified: May 7, 2024 10:46

I recently did a stock study on ResMed Inc. (RMD) with a closing price of $216.94. The previous study is here.

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 10 years, 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 EPS dips in ’17, ’18, and ’21. FY ends June 30.

Over the past decade, 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%. 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. M* rates the company “Exemplary” for Capital Allocation and assigns a “Narrow” economic moat. Quick Ratio is 1.3.

With regard to sales growth:

• YF projects YOY 10.8% and 7.2% for ’24 and ’25, respectively (based on 16 analysts).
• Zacks projects YOY 10.4% and 7.1% for ’24 and ’25, respectively (6 analysts).
• Value Line projects 7.0% annualized growth from ’23-’28.
• CFRA projects 10.9% YOY and 8.8% per year for ’24 and ’23-’25, respectively.
• M* provides a 2-year ACE of 8.9% and projects 5-year annualized growth of 10.0% in its analyst note.

My 7.0% per year forecast is at the bottom of the range.

With regard to EPS growth:

• MarketWatch projects 11.6% and 11.4% per year for ’23-’25 and ’23-’26, respectively (based on 22 analysts).
• Nasdaq.com projects 13.0% YOY and 11.9% per year for ’25 and ’24-’26 (6, 6, and 4 analysts for ’24, ’25, and ’26).
• Seeking Alpha projects 4-year annualized growth of 13.1%.
• YF projects YOY 20.0% and 11.6% for ’24 and ’25, respectively (12), along with 5-year annualized growth of 13.0%.
• Zacks projects YOY 17.8% and 13.0% for ’24 and ’25, respectively (6), along with 5-year annualized growth of 10.7%.
• Value Line projects annualized growth of 9.2% from ’23-’28.
• CFRA projects 20.7% YOY and 13.9% per year for ’24 and ’23-’25, respectively, along with a 3-year CAGR of 11.0%.
• M* projects long-term annualized growth of 13.5%.

My 9.0% per year forecast is below the long-term estimate range [mean of five: 11.9%]. I will use ’23 EPS of $6.09/share as the initial value rather than 2024 Q3 $6.51 (annualized).

My Forecast High P/E is 30.0. Over the past decade, high P/E trends up from 24.0 (’14) to 40.7 (’23) with a last-5-year mean of 52.7 and a last-5-year-mean average P/E of 44.1. I am 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 trends 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 (19.7).

My Low Stock Price Forecast (LSPF) of $140.10 is default based on $6.09/share initial value. This is 35.4% 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 0.8. Total Annualized Return (TAR) is 6.3%.

PAR (using Forecast Average—not High—P/E) is less than the current yield on T-bills at 3.8%. 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 222 studies done in the past 90 days (my study along with 81 other 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 7.4%, 10.0%, 36.8, 28.0, and 39.2%. I am lower across the board. Value Line’s future average annual P/E of 28.0 is lower than MS (32.4) but higher than mine (26.5).

MS high / low EPS are $9.81 / $6.05 versus my $9.37 / $6.09 (per share). My high EPS is less due to a lower growth rate. Both are less than Value Line high EPS of $10.00.

MS LSPF of $145.20 implies a Forecast Low P/E of 24.0 vs. the above-stated 28.0. MS LSPF is 14.3% less than the default $6.05/share * 28.0 = $169.40 resulting in more conservative zoning. MS LSPF remains 3.6% greater than mine.

TAR (over 15.0% preferred) is much less than MS 14.2%. I believe MOS to be robust in the current study.

With regard to valuation, PEG is 2.7 and 3.4 per Zacks and my projected P/E, respectfully: both overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] is still cheap at 0.76.

While still within the stock price range of the last three years, RMD currently trades near its 2024 high.

RMD is a BUY under $175/share. With a forecast high price ~$280, my personal TAR criterion won’t be satisfied until ~$140.

Full disclaimer: I currently own shares of RMD.