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The investment that helps people sleep better at night

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Key statistics: ASX: RMD
Closing share price 21.11.17: $11.290
52-week high: $11.30
52-week low: $7.760
Most recent dividend: 3.199c
Annual dividend yield: 1.11%
Franking: 0%

 

We like to invest in businesses with products and services where the underlying demand is strong and predictable. And when it comes to predictability, there are few things as certain as demographic trends that people in the developed world are getting heavier.

What we do know is that older, heavier people are more prone to the medical condition Obstructive Sleep Apnea, a disease in which your airways close during sleep, leading to an inability to breathe.

Resmed (ASX: RMD) – the Aussie Obstructive Sleep Apnea treatment business – is a company we really like. Its first quarter results in October 2017 were again impressive, propelling the stock price to all-time highs.

When we reviewed the prior full year results, we felt management’s guidance was very conservative, which did see some weakness in the share price at the time.

What the market took as disappointing was that the management team was not guiding for a significant uplift in gross margin which would be expected if high margin masks shipments were to recover after a supply constraint associated with the introduction of a new model.

In the 1Q results, revenue for the quarter was $523.7 million, a 13% increase compared with the same period of the prior year.  The company reported its bottom line rose to $94.14 million, or $0.66 per share. This was higher than $87.66 million, or $0.62 per share, in last year’s first quarter.

The 1Q results were very encouraging, even though gross margin did increase slightly, the reason why management is being conservative is becoming clear to investors.

The sales of devices – the pumps you attach the masks to – are very strong which is indeed a positive development as it increases the installed base and sets the company up for the long term with recurring replacement mask sales and software revenues and is a very profitable business even if not at the same absolute margin level as masks.

What we can say is that in the current environment, where we very much struggle to find good value, companies with very strong and predictable demand drivers are very attractive.

The Montgomery Funds own shares in Resmed.

Written by Roger Montgomery

Roger Montgomery

Roger Montgomery is the chairman and CIO of Montgomery Investment Management.

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