Pricing, volume, competition, and backlog factors are all in ResMed’s favour now. US durable medical equipment companies have soaked up their 130% July allocations and still need more. The volume growth now being achieved by RMD will force consensus earnings forecasts into upgrades, in our view.
July is likely to be the second largest month for allocations since the recall. US DME’s have likely taken everything on offer from RMD including ~100% of full service (4G) devices and ~30% of card-tocloud (CTC) devices.
The torrent of ‘cheapPAP’ devices in the market are selling at much higher prices and are lower quality which makes RMD product even more attractive and in demand.
RMD management remain confident that this surge in demand is not a short term boost. Consequently, RMD has made structural fixes to its manufacturing capacity to generate the volume growth expected.
If the current demand persists through to September, as we think it will, RMD will achieve its targeted sequential quarterly growth for 1Q23f. Consensus forecasts are implying flat or very modest sequential monthly growth in 1Q23f suggesting upgrades are imminent if we are correct.
Price increases have been implemented from 1 July 2022. RMD’s range of respiratory products will enjoy a rare price increase which should boost gross margins beyond previous guidance.
Investment view
A backlog of care and a competitor product recall has combined with a shortage of product to hand RMD a unique opportunity. Price increases and big demand will drive 1H23f earnings much higher. The backlog is such that the earnings growth pathway through FY23- 24f for RMD is now independent of competitor behaviour (Philips Electronics) and the timing of its return to market.
The 12.8% 3-year compound annual earnings growth rate implied by the market is too light, in our view. We will look to the FY22 result announcement for updated commentary on demand and mix of products as well as the cost of inputs due to inflation.
Risks to investment view
The key risks to RMD earnings are from a change in demand, pricing, and costs. There is clinical risk, competition, technical innovation and change of practice factors to be considered.
Recommendation
We have retained our Buy recommendation.
Figure 1: RMD 1 July 2022 price increases
Source: Sandstone Insights
