ResMed: Result 2014

The excuses were flowing at ResMed’s full-year results in an effort to explain why US sales missed expectations in the fourth quarter, leading to a 7% fall in sales for the Americas to US$215m.

We heard that distributors had changed buying patterns to reduce stock levels, resulting in fewer large end-of-year orders. We also heard of slow mask sales due to the ‘transition’ to the new AirFit range – this was compounded by the ‘new pricing structures’ introduced in the third quarter. Finally, rumours circulating towards the end of the quarter of a new range of flow generators led to some potential customers delaying orders for that category.

Is there anything in these excuses? Probably. But it also now looks like management was wrong to be so sanguine about the introduction of Medicare competitive bidding to the US market (see our update on 31 Jan 13 (Long Term Buy – $4.15)). The main reason for the weak US performance is more likely margin pressure from the competitive bidding and we’d be happier if management just came out and said it.

But it wasn’t all bad. Sales outside the Americas rose 9% to US$200m, helped by favourable currency movements, but were still 5% higher in constant currency terms indicating that the company’s products remain competitive. Overall, fourth quarter revenues were flat (down 1% in constant currencies), while full-year revenues rose 3% to US$1.55bn.

The favourable currency effects also extended to costs and, together with some manufacturing and supply chain improvements, they more than offset the price falls, to give a full-year gross margin of 63.6% (compared to 62.1% in 2013) and a full-year operating margin of 26.5% (compared to 25.1% in 2013). The result was an 8% increase in both earnings before interest and tax (EBIT), to US$411m, and the underlying net profit, to US$349m.

With 1.4% fewer shares thanks to the ongoing buyback program, underlying earnings per share rose 9% to US$2.42 (for the US-listed stock which has 10 times the economic interest of the ASX-listed stock), which isn’t bad for a disappointing year.

Despite US$208m being spent on buying back shares during the year and a further US$144m being paid out as dividends, ResMed ended the period with net cash of US$605m, an increase of US$30m. A final quarterly dividend of US$0.28 per US-listed share will be paid, with a tenth of the A$ equivalent being paid to holders of the ASX-listed stock (unfranked, ex date 19 Aug).

So, despite the recent problems in the US and some misgivings about management’s candour, ResMed remains a high-quality business with excellent growth prospects. It’s also available at an attractive price, with the ASX-listed stock on a price-earnings ratio of 20 times the earnings just announced and 18 times those expected for 2015, based on an A$/US$ exchange rate of 0.93. The stock is up 8% since Blue chip battle: Cochlear v. ResMed on 8 Apr 14 (Buy – $4.88), BUY.

Note: Our model Growth and Income portfolios hold shares in ResMed.