Over the last couple of decades, there has been an explosion in ‘lifestyle’ diseases like hypertension, obesity, and diabetes. Over time, these afflictions can start affecting patients’ respiratory and sleep patterns which can exacerbate health issues.

Currently, about 5% of men in the US and 3% of women have respiratory issues during sleep. And, these numbers are projected to grow at a double-digit rate over the next decade given trends in childhood obesity, diabetes, etc. 

While this is unfortunate in many ways. It’s also an opportunity for companies that can deliver effective treatments that provide relief. Today, I will analyze Resmed, Inc. (RMD). RMD is a medical technology company that creates devices and software for the Sleep and Respiratory Care markets. RMD sells CPAP devices and masks as well as devices for obstructive pulmonary disease, neuromuscular disease, and other respiratory-related conditions. 

Background

In 1981, Professor Colin Sullivan at the University of Sydney developed the first successful CPAP device as a treatment for obstructive sleep apnea syndrome. He went on to patent the technology and partnered with Chris Lynch, a managing director at Baxter Healthcare, in 1986 to begin manufacturing the device.

From these modest origins, ResMed has become a $38 billion company with a 763% gain over the last decade. ResMed is #2 in terms of market share for CPAP devices. It’s also expanded into adjacent products and services but CPAP devices remain its largest source of revenue. 

Growth Potential

RMD combines the high margins and growth potential of a technology stock with the wide moat, and stable, growing revenues of a healthcare company. It only has a handful of competitors, but more importantly, its total addressable market (TAM) will keep growing at a double-digit rate due to the aging population and rising rate of obesity. 

Thus, it’s not surprising that RMD has a consistent track record of steady growth. Additionally, once users start using its devices, they are unlikely to switch given the expense and inconvenience. Users also become reliant on it due to improvements in health from better sleep quality.

These positives are reflected in RMD’s average annual growth rate of 17% over the last decade. And, this momentum is nowhere close to slowing as analysts are forecasting a slight acceleration in revenue growth over the next 5 years at 21%.

We can see this momentum in its recent earnings report which showed revenues increasing by 12% and net income by 5%. Next year, analysts forecast revenue growth and EPS growth of 17% and 15%, respectively. 

Value

Growth stocks with big margins and a deep and wide moat tend to have higher than normal valuations. This is because there is more certainty about its long-term projections. 

RMD is no different as it has a forward P/E of 37 which is above the S&P 500’s forward P/E of 19. However, RMD’s valuation looks much better when accounting for its above-average growth prospects with a PEG of 2.8. Further, RMD has no debt and is profitable with positive free cash flow. 

Another factor in RMD’s above-average multiple is that it still is primarily focused on the North American market and just beginning international expansion. These types of lifestyle diseases which lead to sleep and respiratory issues are becoming common all over the world including in countries like Asia and Africa in which middle-class people are adopting Western diets and lifestyles. 

POWR Ratings

RMD is also a standout in terms of the POWR Ratings with an overall B rating which translates to a Buy. The POWR Ratings assess stocks by 118 distinct factors, each with its own weighting.

RMD has strong ratings across the board including a B grade for Quality due to being one of the leading companies in its growing niche. It also has a B for Stability as its long-term prospects are disconnected from short-term issues like economic growth rates or monetary policy. Within the Medical – Devices & Equipment industry, RMD is ranked #28 out of 165 stocks. Click here to see RMD’s complete POWR Ratings. 

RMD is just one of 12 selections in my POWR Growth portfolio. That’s where I  combine my many years of investing experience with the Top 10 Growth Stocks strategy, which has +46.42% annual returns, to bring investors the best growth stocks for today’s market.

If you would like to see the current portfolio of 12 stocks and be alerted to our next timely trades, then consider starting a 30-day trial by clicking the link below.

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RMD shares were trading at $260.35 per share on Friday afternoon, up $1.13 (+0.44%). Year-to-date, RMD has gained 0.12%, versus a -6.64% rise in the benchmark S&P 500 index during the same period.

About the Author: Jaimini Desai

Jaimini Desai has been a financial writer and reporter for nearly a decade. His goal is to help readers identify risks and opportunities in the markets. He is the Chief Growth Strategist for StockNews.com and the editor of the POWR Growth and POWR Stocks Under $10 newsletters. Learn more about Jaimini’s background, along with links to his most recent articles. More...

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