ResMed (RMD) shares have more room for gains despite their recent run-up over the past month as the company's earnings strengthen and the Australian dollar provides greater tailwinds, according to RBS Morgans.
The broker upgraded the medical device maker's stock to "outperform" from "neutral", seeing a nearly 10% upside with a target price of $5.97.
While RBS Morgans realises ResMed's prices will further soften in the face of competitive pressures in the US, it thinks the company will be able to deal with this in a variety of ways – given management's ability to maintain margin stability so far – including cost-outs, manufacturing efficiencies and more volume-based deals.
The broker forecasts the benefits from the weakening Australian dollar to contribute 0.7% to the company's gross margin in the first quarter of 2013-14, with greater benefits in the second quarter.
ResMed's forward price-earnings (P/E) ratio at 19 times isn't too demanding "given [the company's] ability to deliver double-digit earnings growth, further increase capital management and gain from an environment where other sectors remain out of favour," according to the broker.