On Wednesday, Wolfe Research adjusted its stance on ResMed (NYSE:RMD), downgrading the shares rating from Peer Perform to Underperform. The firm has also set a new price target for ResMed at $180.00, a change that reflects a revised perspective on the company's future earnings and market risks.
The downgrade is based on the anticipation of competitive pressures that ResMed may face in the coming years.
Wolfe Research cited concerns about Eli Lilly (NYSE:LLY)'s expected introduction of a new medication for obstructive sleep apnea, which could significantly impact ResMed's continuous positive airway pressure (CPAP) device market share. The firm's analysis suggests that the total addressable market (TAM) for CPAP devices could see a long-term decline of 15%-25% due to this new development.
Wolfe Research's price target of $180.00 is derived from applying a 20 times price-to-earnings (P/E) multiple to the next twelve months (NTM) estimated earnings per share (EPS) of approximately $9.00 for ResMed. The applied multiple is at the higher end of the 15-20 times range typically associated with mid-single-digit (MSD) growth companies.
The firm indicates that this valuation reflects a cautious outlook, considering the potential reduction in high-single-digit (HSD) growth expectations for ResMed due to the anticipated market disruption.
The analysis by Wolfe Research suggests that the market may need to adjust its growth expectations for ResMed from a high-single-digit to a mid-single-digit rate. This adjustment is based on the projected impact of Eli Lilly's GLP-1 medication tirzepatide on ResMed's CPAP business, which is expected to launch with an indication for treating obstructive sleep apnea in the 2025-2026 timeframe.
In summary, Wolfe Research has downgraded ResMed to Underperform with a $180 price target, reflecting concerns over upcoming competition and its potential to disrupt ResMed's growth trajectory in the CPAP market.
In other recent news, ResMed Inc. experienced a shift in stock rating as investment firm Needham downgraded its rating from Buy to Hold due to anticipated challenges in the competitive landscape and slowing growth in the fiscal year 2025. Contrarily, William Blair maintained an Outperform rating on ResMed, expecting a significant increase in sleep apnea and CPAP patients by 2025.
ResMed's fourth quarter of fiscal year 2024 saw strong financial performance, with a 9% increase in group revenue reaching $1.22 billion, primarily driven by robust mask sales in the United States. This led to CLSA increasing the price target for ResMed to AUD35.00 and RBC Capital revising its price target to AUD206.00, despite concerns about weaker device growth and potential long-term competition.
ResMed also reported a 10% increase in its quarterly dividend to shareholders, reduced its debt by $300 million, and repurchased 232,000 shares for $50 million. The company plans to invest in research and development, pursue acquisitions, and continue its share buyback program.
InvestingPro Insights
As investors consider Wolfe Research's downgrade of ResMed (NYSE:RMD), it is important to look at the company's current financial health and market performance. According to real-time data, ResMed boasts a strong market capitalization of $36.86 billion. The company's P/E ratio stands at 36.09, indicating a premium valuation that reflects investors' high expectations of future earnings. Despite the concerns raised by Wolfe Research, ResMed has demonstrated a solid revenue growth of 10.95% over the last twelve months as of Q4 2024, suggesting a resilient business model.
ResMed's ability to maintain dividend payments for 13 consecutive years, as noted in one of the InvestingPro Tips, shows a commitment to returning value to shareholders. Moreover, with analysts revising their earnings upwards for the upcoming period, there is a sense of optimism around the company's earnings potential. While the firm is trading at a high earnings multiple, this could be justified by its consistent performance and the strategic management of its financials, including a moderate level of debt and liquidity that exceeds short-term obligations.
For investors seeking more in-depth analysis, there are additional InvestingPro Tips available at https://www.investing.com/pro/RMD. These tips provide further insights into ResMed's valuation multiples, dividend growth, and return metrics, which can help investors make more informed decisions amidst market uncertainties.
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