ResMed – making all the right moves

Price at posting – $3.30 (ASX – RMD)

Sometimes looks can be deceiving. An investor studying the share price action of obstructive sleep apnea specialist ResMed would probably conclude that things have been tough of late. Since peaking in mid 2010 at close to $4.00 per share the company’s valuation has been heading south for some time, sliding below $2.50 in recent months. However nothing could be further from the truth. In fact ResMed’s price action has more to do with investor expectations and the business multiple applied to the business than the business itself. Since listing in 1999 the company has expanded at a rapid pace as it sought to meet the needs of a growing patient base suffering from sleep disorder breathing, a condition where a patient stops breathing during their sleep. Growing public awareness of the long term impacts of this illness has seen ResMed cement its position as the global leader with a market share estimated at 40% of a industry turning over US$3 billion in annual revenue.

However what has impressed us most has been how the business has evolved over the past decade. ResMed has always displayed the four business pillars that we seek in any investment, namely management, business franchise, balance sheet strength and a shareholder return bias. To be fair it hasn’t always always been that way. A period associated with significant capital investment coupled with difficult industry conditions led many to question the merit of investors ever receiving an adequate return on their investment.

Fast forward to August 2012 and the financial results are plainly evident even if the share price chart tells a somewhat different story. The ResMed business is hitting its straps and management should be roundly applauded. On almost every business metric ResMed is in superb shape and the outlook is equally rosy. The group has just reported record revenues of US$1.4 billion, net profits of US$254 million, invested over US$100 million in fully costed research and development, declared its first dividend to shareholders at the rate of US17 cents per quarter (equal to full year dividend yield of 2%) and ended the year with over US$500 million net cash in the bank. At the micro level, gross margins are strong at 60%, free cash flow is on the up and capital expenditure is trailing the group’s annual depreciation charge.

In my experience such self sustaining businesses are rare and should ResMed maintain its current financial discipline, years down the track investors will view the today’s share price as a wonderful entry point.

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