On Monday, Citi revised its stance on ResMed (RMD:AU) (NYSE: RMD), downgrading the stock from Buy to Neutral and adjusting the price target to AUD30.00 from the previous AUD36.00. The revision follows insights from the SURMOUNT study, which showed that tirzepatide could lead to obstructive sleep apnea (OSA) remission in a significant portion of patients. According to the study, 40-50% of patients on the medication experienced a reduction in OSA symptoms, with about 20% achieving no OSA and approximately 25% reaching a state of mild asymptomatic OSA.
The findings suggest that GLP-1 treatments could be an effective option for roughly 70% of OSA sufferers who are obese. Citi anticipates that continuous positive airway pressure (CPAP) therapy will still be used alongside GLP-1s initially due to the GLP-1 dose escalation period of around 20 weeks. This forecast includes the expectation of a gradual rebasing of the CPAP device market over the coming years, along with Philips (LON:0LNG) recovering about 20% of its market share, 10% of which may be at the expense of ResMed.
Citi has also adjusted its earnings per share (EPS) forecasts for ResMed for fiscal years 2024 to 2026, with a reduction of 0-2% and a more significant decrease of 6-7% for the outer years. The firm's discounted cash flow (DCF) based target price has been reduced to $30. The new price target implies a forward price-to-earnings (PE) ratio for fiscal year 2026 of 20 times, which represents a roughly 15% discount to the pre-pandemic average PE ratio of approximately 24 times. This recalibration of expectations reflects the potential market shifts due to the emergence of new treatments for OSA.
In other recent news, ResMed reported strong Q3 results, with a 7% increase in constant currency terms, leading to a group revenue of $1.2 billion. The growth was driven by a 5% increase in device sales and a 10% rise in mask and accessories sales. Net income and non-GAAP diluted earnings per share also saw a noteworthy 27% increase.
The company's earnings call highlighted a strategic focus on expanding the sleep and breathing health market and investing in digital health technology. ResMed plans to leverage consumer tech and Big Pharma trends, focusing on the non-invasive ventilation market with its AirSense 11 and AirCurve 11 platforms.
Despite potential headwinds from the Middle East conflict, which could impact Q4 gross margin, ResMed maintains a positive outlook. The company declared a quarterly dividend of $0.48 per share and confirmed the continuation of its share buyback program.
InvestingPro Insights
In light of Citi's recent downgrade of ResMed, it's beneficial to consider the company's financial health and market performance through real-time data from InvestingPro. With a market capitalization of $30.23 billion and a P/E ratio of 32.17, ResMed is valued at a premium in the market, which aligns with Citi's view of the company's high earnings multiple. The adjusted P/E ratio for the last twelve months as of Q3 2024 stands slightly lower at 30.46, still indicating a robust valuation. Moreover, the company's revenue growth of 14.16% over the last twelve months suggests a strong top-line expansion, which may cushion some concerns over the impact of new OSA treatments on ResMed's market share.
Two notable InvestingPro Tips for potential investors include the company's consistent track record of raising dividends, now for 13 consecutive years, which may appeal to income-focused investors. Additionally, ResMed's liquid assets exceeding short-term obligations indicate a solid financial position to weather market uncertainties. For those considering a deeper dive into ResMed's investment potential, InvestingPro offers additional insights, including 6 analysts having revised their earnings upwards for the upcoming period, which could signal confidence in the company's future performance. To access these insights and more, visit https://www.investing.com/pro/RMD and use the coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription. With 12 additional InvestingPro Tips available, investors can gain a comprehensive understanding of ResMed's investment profile.
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