Coverage Initiated on ResMed - Analyst Blog

On Mar 10, 2014, we initiated coverage on ResMed, Inc. RMD. ResMed delivered a weak second-quarter fiscal 2014 with both the top and the bottom line lagging the respective Zacks Consensus Estimate. However, the still-untapped obstructive sleep apnea (OSA) market should catalyze growth in the near term.

In the quarter under review, the company's adjusted earnings per share of 60 cents missed the Zacks Consensus Estimate by 3 cents. Results, however, surpassed the prior-year quarter's earnings of 53 cents per share, registering an increase of 13.2% year over year. Revenues also grew 2.1% year over year to $384.3 million but remained well below the Zacks Consensus Estimate of $396 million.

The CMS decision on competitive bidding was a major letdown for the company. In the last reported quarter, net revenue in North and Latin America declined 2% primarily due to increased competitor activity and market restructuring on account of competitive bidding. Moreover, the ongoing headwind related to reimbursement issues across the world along with the recent healthcare reform in the U.S. is taking a toll on the company's business.

However, ResMed continues to gain from a solid foothold in the huge sleep-disordered breathing (SDB) market. According to the company, several initiatives are now being taken to increase awareness regarding OSA. This has led to improved understanding of the role of SDB treatment in the management of cardiac, neurologic, metabolic and related disorders, and has driven an increase in home-based diagnosis, which in turn, promises a growing SDB market for the company in the near future.

Continuous solid overseas growth amid several macroeconomic uncertainties is also encouraging. Robust pipeline development also bolsters confidence. Meanwhile, ResMed has been rewarding its shareholders with attractive share repurchases and dividends.

The stock currently carries a Zacks Rank #2 (Buy).

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Other stocks like Covidien plc COV, Stryker Corp. SYK and SurModics, Inc. SRDX are also expected to do well. All the three stocks hold the same Zacks Rank as ResMed.