ResMed hits its straps

After a first-quarter full of promise, ResMed delivered the good in its second quarter, with revenues of US$423m and earnings per ASX-listed share of US6.4c, ahead of forecasts for US$410m and US6.3c respectively.

It was particularly pleasing to see such a strong revenue performance, which backs up management's assertion that recent new product launches are selling well – particularly the AirSense 10 and AirCurve 10 flow generators. Indeed US flow generator revenues grew by 25% over the comparable quarter.

One of the key reasons the AirSense 10 has exceeded our expectations,' explained Mick Farrell in the conference call, is the value provided by the 'Air Solutions healthcare infomatics ecosystem' that goes with it. This 'ecosystem' includes the AirView software which can provide on-demand data, fault detection and troubleshooting. All the indications are that these advances have gone down very well with customers.

Strong revenue growth?

It helped the Americas to a 12% rise in revenue to US$231m, but Europe and the Asia Pacific nonetheless had it trumped on a constant currency basis, with growth of 16% to US$192m. ResMed has been investing hard in these markets, building awareness and developing sales channels, and there should be plenty more to come, with Farrell making particular note of the 'significant growth potential in both China and India'.

The gross margin of 62.2% was just above the middle of ResMed's 61–63% guidance range, while selling, general and administrative expenses were roughly flat at 29% of sales, with the lack of any scale benefits reflecting the marketing costs surrounding the new products. Research and development expenses slipped from 7.7% of revenue to 6.9%. With much of the R&D work conducted in Australia, the weaker Aussie dollar meant that a 7% R&D increase in constant currencies translated into a 1% fall in US dollars.

The major niggle with the result was cash flow. Operating cash flow came to US$192m for the half, despite a slight working capital increase due to the increased activity, but after investments of US$72m and US$28m spent settling hedging contracts, free cash flow was only US$92m, barely half the net profit of US$174m. This should improve in future periods as the effect of product launches settles down and we'll be watching to see that it does.

The company also bought back shares worth US$33.5m in the quarter (on top of US43m in the first quarter) and declared a quarterly dividend of 28 US cents per share.

On target

The company is on target to make earnings per ASX-listed share of 26 US cents for the full year, which would translate to about 32.5 Aussie cents at current exchange rates, putting the stock on a forward price-earnings ratio of 24. That's not unreasonable for such a high-quality company with decent growth prospects, but no longer obviously cheap – after rising 44% since we upgraded the stock to Buy last October.

We recommend that you keep our maximum portfolio weighting of 7% in mind and, if your holding has now risen beyond that level, it might be worth taking some profit. With that caveat, we continue to recommend that you HOLD.

Disclosure: The author owns shares in ResMed.