##{"id":58638,"date":"2011-08-08T12:21:05","date_gmt":"2011-08-08T02:21:05","guid":{"rendered":"http:\/\/www.fnarena.com\/index.php\/2011\/08\/08\/resmed-outlook-dominated-by-fx-movements\/"},"modified":"2011-08-08T12:21:05","modified_gmt":"2011-08-08T02:21:05","slug":"resmed-outlook-dominated-by-fx-movements","status":"publish","type":"post","link":"https:\/\/staging.fnarena.com\/index.php\/2011\/08\/08\/resmed-outlook-dominated-by-fx-movements\/","title":{"rendered":"ResMed Outlook Dominated By FX Movements"},"content":{"rendered":"

\n\t– RedMed<\/span> quarterly delivered in key areas
\n\t– Forex<\/span> pressures continue to impact
\n\t– Growth outlook still solid, diversification a benefit
\n\t– Buy ratings still dominate broker views<\/strong><\/p>\n

\n\tBy Chris Shaw<\/p>\n

\n\tSleep disorder group ResMed<\/span> ((RMD<\/span>)) reported 4Q11<\/span> earnings last week and the result had been viewed as an important test given Flow Generator sales, a key market for the company, had been sliding in the US in previous quarters.<\/p>\n

\n\tFor BA Merrill Lynch the result was therefore a solid one, as US Flow Generator growth of 3% was better than the 2% forecast for the period. This suggests Bi-Level sales have now stabilised<\/span>, while the result also offered evidence of a positive mix shift from CPAP<\/span> to APAP<\/span> or Auto-Set Home Sleep Testing models.<\/p>\n

\n\tThis is key for BA-ML, as the mix shift implies a progressive strengthening of earnings growth through FY12<\/span>. It is this earnings growth outlook that underpins the stockbroker's Buy rating on the stock. UBS agrees, noting the 4Q<\/span> result showed US flow generator sales have again turned positive, with this positive momentum likely to follow-on into FY12<\/span>. <\/p>\n

\n\tNot all analysts were so impressed by the result, as RBS<\/span> Australia was concerned by the potential for ex-US sales weakness to continue and the fact the bottom line was supported by a lower tax rate and US$8.3 million in interest in the period.<\/p>\n

\n\tGoldman Sachs also saw enough in the result to lower earnings estimates by 7% in FY12<\/span> and by 6% in FY13<\/span>, this reflecting reductions to gross margin and volume growth assumptions. The other issue for Goldman Sachs and RBS<\/span> is the exchange rate, Goldman Sachs noting assuming current spot forex<\/span> rates relative to FY13<\/span> earnings would reduce its price target to $2.90 from a current $3.25.<\/p>\n

\n\tWhile adverse currency moves are also an issue for Bell Potter, the broker suggested one positive of the 4Q<\/span> result is ResMed<\/span> is managing costs well, while cash on hand continues to build. The cash is being put to use in diversifying the business via acquisitions, a trend RBS<\/span> expects will continue over the medium-term.<\/p>\n

\n\tCiti<\/span> was most bullish on the result and the outlook for ResMed<\/span>, viewing gross margins in the quarter as better than expected as a mix shift to high end flow generators continues and as ResMed<\/span> continues to gain market share in the mask business.<\/p>\n

\n\tStronger margins meant the result was better than both Citi's<\/span> forecast and market consensus and sees Citi<\/span> lift estimates by 3% in FY12<\/span> and by 5% in FY13<\/span>. Macquarie also made minor increases to earnings estimates post the quarterly market update.<\/p>\n

\n\tWhile the weaker US dollar could push down margins in the first quarter of 2012, the mix benefits being achieved should see margins increase further in FY12<\/span> in Citi's<\/span> view. Cost control was also identified by Citi<\/span> as a key, as ResMed<\/span> has the ability to size operating expenses for market growth.<\/p>\n

\n\tIn the quarter ResMed<\/span> expanded into the respiratory ventilation market via the launch of the Stellar 100 and 150 products in the US and Europe, the signing of a US hospitals and related market distribution deal for both products and the acquisition of Grundler<\/span> in Germany. <\/p>\n

\n\tFurther activity in the area is expected in Citi's<\/span> view, which should accelerate the expansion of this business. The benefit of such an expansion is the Respiratory Ventilation business is highly complementary to ResMed's<\/span> existing Sleep Disorder business.<\/p>\n

\n\tGiven consensus earnings per share (EPS) estimates for ResMed<\/span> according to the FNArena<\/span> database stand at US15.7c<\/span> in FY12<\/span> and US19c<\/span> in FY13<\/span>, the market appears reasonably positive on the growth outlook. The timing of this growth is the issue dividing market views, as RBS<\/span> for example sees current forex<\/span> pressures as enough to keep the stock range bound over the shorter-term.<\/p>\n

\n\tBA-ML sees FY12<\/span> shaping as a year of two halves for ResMed<\/span>, expecting forex<\/span> pressures will begin to ease by the second half of FY12<\/span>. This suggests some upside earnings risk from any success in high margin areas such as Ventilation, Bi-Level and APAP<\/span>.<\/p>\n

\n\tCiti<\/span> argues at a 2013 earnings multiple of around 15 times ResMed<\/span> is attractively priced given the growth outlook, even allowing for current forex<\/span> risks. This is especially the case as current forex<\/span> headwinds<\/span> are likely to turn to tailwinds over time, while Citi<\/span> suggests growth should also be boosted by ResMed<\/span> potentially making use of its strong net cash position. <\/p>\n

\n\tCredit Suisse offers a similar view, suggesting the growth outlook for ResMed<\/span> over the next few years is enough to justify the current earnings multiple on the stock.<\/p>\n

\n\tOverall the FNArena<\/span> database shows ResMed<\/span> is rated as Buy five times and Hold three times, while Goldman Sachs also rates the stock as a Hold and Bell Potter has upgraded to Accumulate from Hold. <\/p>\n

\n\tThe consensus price target according to the database is $3.45, which implies upside from current levels of around 28%. Shares in ResMed<\/span> today are slightly weaker and as at 12.00pm<\/span> the stock was down 3c<\/span> at $2.65. Over the past year ResMed<\/span> has traded in a range of $2.61 to $7.22.<\/p>\n

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