ResMed (RMD) - Robust quarter

ResMed develops, manufactures, distributes, and markets medical devices and cloud-based software applications for the healthcare markets. The company operates in two segments, Sleep and Respiratory Care, and Software as a Service, and markets its products to sleep clinics, home healthcare dealers, and hospitals through a network of distributors and direct sales force. ResMed was founded in 1989 and is headquartered in San Diego, California.‍

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ResMed posted December-quarter EPS above market expectations, predominantly driven by strong sales of its masks in the key US market that supported a 16% rise in revenue in that segment, although mask sales in the rest-of-the-world (RoW) segment also grew, implying a gain in market share. Revenue growth in the residential care software (RCS) division was only 5% on a constant-currency basis although the company expects a pick-up in that pace to high single-digits by FY27. Operating cash flow (OCF) proved the only disappointment in the quarter, albeit minor, rising 10% on a year ago but coming in 15% below Ord Minnett’s estimate due to a build-up of working capital. Gross margin 62.3% was up 310 basis points (bp) and circa 20bp ahead of market expectations, supported by cheaper component prices for its machines and masks and production efficiencies.

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RedMed is now guiding to an FY26 gross margin of 62–63%, up from 61–63% previously, and we have upgraded our own forecast to 62.4% from 64.1% as we incorporate cheaper input costs and production efficiencies into our numbers. A mark-to-market adjustment for the stronger Australian dollar currency means our target price in AUD falls to $43.70 from $44.56 despite a rise in our EPS forecasts.

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We maintain a strongly positive view on ResMed as strong earnings growth boosts its net cash position, which should support higher dividends and more capital management. We reiterate our Buy recommendation.

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