ResMed (RMD): A Hidden Gem in the Medical Devices Industry? An In-Depth Look at Its Valuation
ResMed Inc (NYSE:RMD), a global leader in respiratory care devices, experienced a daily loss of -3.76% and a 3-month loss of -30.91%. Despite this, it reported an impressive Earnings Per Share (EPS) of 6.1. This raises an intriguing question: Is ResMed (NYSE:RMD) significantly undervalued? To answer this, we'll undertake a comprehensive valuation analysis. So, let's dive in!
A Glimpse into ResMed
ResMed is a prominent player in the global respiratory care device industry, specializing in the development and supply of flow generators, masks, and accessories for sleep apnea treatment. The increasing diagnosis of sleep apnea, coupled with ageing populations and rising obesity prevalence, is fueling market growth. ResMed generates about two-thirds of its revenue in the Americas, with the balance spread across regions dominated by Europe, Japan, and Australia. The company has also made significant strides in digital health, aiming to differentiate itself by providing clinical data for patients, medical care advisors, and payers in the out-of-hospital setting.
Unraveling the GF Value
The GF Value is a proprietary measure of intrinsic stock value, calculated based on historical trading multiples, a GuruFocus adjustment factor based on past returns and growth, and future business performance estimates. The GF Value Line provides an overview of the fair value at which the stock should ideally be traded. If the stock price is significantly above the GF Value Line, it is overvalued, and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
ResMed (NYSE:RMD), with a current price of $153.21 per share and a market cap of $22.50 billion, is believed to be significantly undervalued according to the GF Value calculation. This suggests that the long-term return of ResMed's stock is likely to be much higher than its business growth.
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Assessing ResMed's Financial Strength
Investing in companies with low financial strength could result in permanent capital loss. Therefore, a careful review of a company's financial strength is crucial before deciding to buy shares. ResMed has a cash-to-debt ratio of 0.14, ranking worse than 89.7% of 835 companies in the Medical Devices & Instruments industry. Based on this, GuruFocus ranks ResMed's financial strength as 7 out of 10, suggesting a fair balance sheet.
Profitability and Growth Prospects
Investing in profitable companies, especially those demonstrating consistent profitability over the long term, poses less risk. ResMed has been profitable 10 out of the past 10 years. Over the past twelve months, the company had a revenue of $4.20 billion and an Earnings Per Share (EPS) of $6.1. Its operating margin is 27.26%, ranking better than 90.92% of 826 companies in the Medical Devices & Instruments industry. Overall, GuruFocus ranks ResMed's profitability at 10 out of 10, indicating strong profitability.
Growth is a crucial factor in a company's valuation. The faster a company is growing, the more likely it is to be creating value for shareholders, especially if the growth is profitable. ResMed's 3-year average annual revenue growth rate is 12.2%, ranking better than 63.4% of 724 companies in the Medical Devices & Instruments industry. The 3-year average EBITDA growth rate is 10.4%, ranking better than 53.36% of 729 companies in the industry.
ROIC vs WACC
Another way to determine a company's profitability is to compare its return on invested capital (ROIC) to the weighted average cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. The WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. When the ROIC is higher than the WACC, it implies the company is creating value for shareholders. For the past 12 months, ResMed's ROIC is 17.77, and its WACC is 9.28.
Conclusion
In summary, the stock of ResMed (NYSE:RMD) is believed to be significantly undervalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks better than 53.36% of 729 companies in the Medical Devices & Instruments industry. To learn more about ResMed stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
