Continuing my theme of dollar-exposed industrials as the favoured sector for stocks, find below an update on Resmed from Goldman Sachs:
What’s changed
In the past few weeks, we have met with a number of US industry participants, including suppliers, sleep labs and DMEs (distributors). The general feedback was that the overall market remains sound, driven partly by strength in high-priced, high margin bi-level machines. The core CPAP/APAP machines are also showing good growth but mask volumes are patchy. All players expect the onset of competitive bidding to result in larger than normal price concessions by suppliers; it would appear industry leader Resmed has to date given the least concessions.
Implications
There is little question that the OSA industry in the US is entering a period of heightened industry change with reimbursement cuts driving DME consolidation. The next 12-18 months could therefore see periods of volatility in earnings for both suppliers and distributors. We have therefore moved to a more cautious position on pricing cuts for RMD. Even so, our base case is that strong growth in bi-levels, the lower $A, and an ongoing focus on cost efficiency will likely provide RMD with sufficient offset to generate double digit earnings growth in FY14E.
Valuation
We downgrade EPS in FY13-FY15 by 2%-5% driven by larger price cuts and softer gross margins, offset by updated impacts from new FX forecasts. We also assume a US$15mn hedge book loss in 4Q13E. RMD is trading on 19x FY14E at spot FX in line with its average of the past four years. It has net cash of c.US$700mn and strong leverage to a lower AUD. We retain
Buy, Conviction List.
Key risks
Greater volatility in quarter-on-quarter earnings from large movements of share between DMEs or greater-than-expected pricing pressure due to competitive bidding; declines in mask replenishment rates; market share losses from competitor product launches.
