ResMed was one of the high conviction stocks pitched by Chris Kourtis of Ellerston Capital at the 2023 Sohn Hearts & Minds Conference.
ResMed (RMD) was up 11% in January and is up 26% since our purchase in November. The shares continued to rally post the release of its quarterly result towards the end of the month. The result was ahead of consensus forecasts, driven by better-than-expected revenue combined with good operating leverage. Whilst revenue was +2% ahead of forecasts, primarily reflecting better-than-expected device revenue, the crux of the beat was the gross margin figure of 56.9%. Revenue growth of +12% YoY provided EPS growth of +13%, however, EBIT rose an impressive +20% YoY. Analyst forecasts are now finally implying incremental gross margin improvement over the balance of FY24, which combined with cost reduction initiatives, supports further EBIT margin expansion and robust earnings growth. With regard to new mask launches, regulatory and reimbursement approval has been received. The new mask offering, with market launch “coming soon", should improve mask/accessories sales and overall margins.
GLP-1 commentary was reiterated: ResMed data highlighted that patients on a GLP-1 RA were more likely to initiate PAP (ResMed’s) therapy, with higher rates of adherence and re-supply. Further, CEO Mick Farrell’s commentary indicated the potential for the SURMOUNT-OSA trial to show the benefits of PAP in combination with GLP-1 RA (as opposed to substitution), but it’s still early days here and no doubt future data will provide mixed results.
To add fuel to the share price recovery, towards month end, key competitor Philips released its Q4 2023 results and finally agreed to the terms of a Consent Decree with the US DOJ and the FDA post its device recall. In the US, Philips Respironics will continue to service sleep and respiratory care devices already with healthcare providers and patients, and supply accessories, consumables and replacement parts (including repair kits). However, until the relevant requirements of the consent decree are met, Philips Respironics will not be allowed to sell any new CPAP or BiPAP sleep therapy devices or other respiratory care devices in the US. As a consequence of addressing this consent decree, which will be a multi-year plan, Philips recorded a provision of EUR 363 million in Q4 2023 that relates to remediation activities, inventory write-downs and onerous contract provisions. This effectively cements RMD’s already dominant estimated market share of ~82% in the US.
You can watch Chris' stock pitch from the conference below: