ResMed Earnings: Strong Mask Sales and Cost Control Offset U.S. Device Softness

We maintain our USD 258 fair value estimate for narrow-moat ResMed RMD, or AUD 40 per CDI at current exchange rates, following first-quarter fiscal 2024 results. Underlying EBIT of USD 319 million grew 4% sequentially on fourth quarter fiscal 2023, with sales down 2% but underlying EBIT margin expanded roughly 150 basis points to 29%. We decrease our revenue forecasts over the next five years by 1% on average, but our underlying EBIT forecasts increase by 1% on average, overall.

Shares are materially undervalued. We anticipate margin expansion as ResMed’s sales mix shifts to higher-margin masks and cost inefficiencies of producing its older AirSense 10 device cease. While first-quarter gross margin expanded just 20 basis points sequentially to 56% versus the fourth quarter, this is largely due to the firm still working through higher-cost inventory given historically higher component and freight costs. In addition, SG&A, expenses decreased to 20.2% of revenue in the first quarter versus 21.5% in fourth quarter fiscal 2023. Following the result, the firm also reduced its global workforce by 5% in October 2023, largely in noncore SG&A activities. Accordingly, management revised its prior guidance, now expecting fiscal 2024 SG&A expenses to be 18% to 20% of revenue from 20% to 22% prior, and fiscal 2024 research and development expenses to be 6%-7% of revenue from 7%-8% prior. We expect this to support our assumption of EBIT margin improving to 34% by fiscal 2028.

On the revenue side, U.S. device sales fell 11% sequentially to USD 346 million following a period of clearing backorders with its AirSense 10 Card-to-Cloud device. However, this was largely offset by U.S. mask sales up 7% sequentially to USD 293 million, and device sales outside the Americas up 2% sequentially to USD 219 million. With supply constraints easing on AirSense 11, the firm is focused on delivering more units into these markets and launched the device in Australia and New Zealand in first quarter.