- By GF Value
The stock of ResMed (NYSE:RMD, 30-year Financials) is believed to be modestly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $205.31 per share and the market cap of $29.9 billion, ResMed stock is estimated to be modestly overvalued. GF Value for ResMed is shown in the chart below.
Because ResMed is relatively overvalued, the long-term return of its stock is likely to be lower than its business growth, which averaged 11.9% over the past three years and is estimated to grow 8.90% annually over the next three to five years.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. ResMed has a cash-to-debt ratio of 0.27, which is worse than 88% of the companies in the industry of Medical Devices & Instruments. GuruFocus ranks the overall financial strength of ResMed at 7 out of 10, which indicates that the financial strength of ResMed is fair. This is the debt and cash of ResMed over the past years:
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. Typically, a company with high profit margins offers better performance potential than a company with low profit margins. ResMed has been profitable 10 years over the past 10 years. During the past 12 months, the company had revenues of $3.1 billion and earnings of $3.13 a share. Its operating margin of 28.92% better than 89% of the companies in the industry of Medical Devices & Instruments. Overall, GuruFocus ranks ResMed's profitability as strong. This is the revenue and net income of ResMed over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of ResMed is 11.9%, which ranks better than 69% of the companies in the industry of Medical Devices & Instruments. The 3-year average EBITDA growth rate is 18.6%, which ranks in the middle range of the companies in the industry of Medical Devices & Instruments.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, ResMed's ROIC was 12.80, while its WACC came in at 2.29. The historical ROIC vs WACC comparison of ResMed is shown below:
In closing, the stock of ResMed (NYSE:RMD, 30-year Financials) gives every indication of being modestly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks in the middle range of the companies in the industry of Medical Devices & Instruments. 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.