ResMed stock (NYSE: RMD), a respiratory care devices company, currently trades at $150 per share, 23% below the level seen in March 2021, and it has room for growth, in our view. RMD stock was trading at around $210 in early June 2022, just before the Fed started increasing rates, and is now nearly 30% below that level, compared to 14% gains for the S&P 500 during this period. The recent stock decline can partly be attributed to downbeat Q4 fiscal 2023 results (fiscal year ends in June).
Interestingly, RMD stock has had a Sharpe Ratio of 0.5 since early 2017, lower than 0.6 for the S&P 500 Index over the same period. This compares with the Sharpe of 1.3 for the Trefis Reinforced Value portfolio. Sharpe is a measure of return per unit of risk, and high-performance portfolios can provide the best of both worlds.
Returning to the pre-inflation shock high of over $297 (seen in Sep 2021) means that RMD stock will have to gain 2x from here, and we don’t think this will materialize anytime soon. That said, RMD stock could see higher levels given that it currently trades at 5x revenues compared to its last five-year average of 9x. Our ResMed Valuation Ratios Comparison dashboard has more details.
Our detailed analysis of ResMed’s upside post-inflation shock captures trends in the company’s stock during the turbulent market conditions seen over 2022. It compares these trends to the stock’s performance during the 2008 recession.
2022 Inflation Shock
Timeline of Inflation Shock So Far:
- 2020 – early 2021: Increase in money supply to cushion the impact of lockdowns led to high demand for goods; producers unable to match up.
- Early 2021: Shipping snarls and worker shortages from the coronavirus pandemic continue to hurt supply.
- April 2021: Inflation rates cross 4% and increase rapidly.
- Early 2022: Energy and food prices spike due to the Russian invasion of Ukraine. Fed begins its rate hike process.
- June 2022: Inflation levels peak at 9% – the highest level in 40 years. The S&P 500 index declined more than 20% from peak levels.
- July – September 2022: Fed hikes interest rates aggressively – resulting in an initial recovery in the S&P 500 followed by another sharp decline.
- October 2022 – July 2023: Fed continues rate hike process; improving market sentiments helps S&P500 recoup some of its losses.
- Since August 2023: Fed has kept interest rates unchanged to quell fears of a recession, although another rate hike remains in the cards.
In contrast, here’s how RMD stock and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)
ResMed
RMD
RMD stock declined from nearly $11 in September 2007 (pre-crisis peak) to $9 in March 2009 (as the markets bottomed out), implying it lost 14% of its pre-crisis value. It recovered after the 2008 crisis to levels of around $13 in early 2010, rising 42% between March 2009 and January 2010. The S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied 48% between March 2009 and January 2010 to reach levels of 1,124.
ResMed’s Fundamentals Over Recent Years
ResMed’s revenue increased from $3.0 billion in 2020 to $4.2 billion in 2023, led by the company’s sleep and respiratory care products and the software as a service business (SaaS). The company’s SaaS business has benefited from its 2022 acquisition of Medifox Dan. ResMed’s operating margin increased from 26% in 2020 to 27% in 2023. However, the company’s gross margin contracted 200 bps in Q4’23 due to higher component and manufacturing costs. The company’s earnings stood at $6.12 on a per-share and reported basis in 2023, compared to the $4.31 figure in 2020.
Does ResMed Have A Sufficient Cash Cushion To Meet Its Obligations Through The Ongoing Inflation Shock?
ResMed’s total debt increased from $1.3 billion in 2020 to $1.6 billion now, while its cash decreased from $463 million to $228 million over the same period. The company also garnered $693 million in cash flows from operations in 2023. Given its solid cash cushion, the company appears well-positioned to service its near-term obligations.
Conclusion
With the Fed’s efforts to tame runaway inflation rates helping market sentiment, we believe RMD stock has the potential for more gains once fears of a potential recession are allayed. That said, unfavorable macroeconomic factors and a decline in margin owing to inflationary pressure are potential risk factors for realizing these gains.
While RMD stock can see higher levels, it is helpful to see how ResMed’s Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.
Invest with Trefis Market Beating Portfolios
See all Trefis Price Estimates
Read the full article here