My featured stock today is a health care company that has created its own unique niche. I have studied the company’s sales and earnings trends. I have read about management’s strategies, goals, and plans for the future. I am confident that I could put all my money into this stock, because the outcome is obvious: the stock will be a winner! In fact, I like it so much that it was featured in the May edition of Cabot Benjamin Graham Value Letter, of which I am the editor.
ResMed (RMD) designs, manufactures and distributes medical equipment and supplies to diagnose and treat sleep-disordered breathing such as apnea. Principal manufacturing facilities are located in Sydney, Australia, where ResMed’s initial products for treating apnea were developed in 1981. The company’s products are distributed in 68 countries throughout the world.
ResMed continues to focus on the development of products to solve sleep problems. These range from snoring, often associated with apnea, to severe apnea, where the airway temporarily collapses during sleep, restricting breathing for 10 seconds or more. Interrupted breathing can occur several hundred times a night and affects about 20% of the adult population.
The company has a strong balance sheet with minimal debt and lots of cash. ResMed pays no dividend. I forecast earnings per share growth of 20% during the next 12 months. EPS growth has averaged 19% during the past 10 years with no declining years.
ResMed has stimulated rapid growth in the sleep-disordered breathing industry by educating physicians and sufferers about serious health problems caused by sleep disorders. Up to 90% of people who have existing problems remain undiagnosed and untreated. The vast number of sufferers offers many opportunities for ResMed to grow rapidly in the future. I believe the company will produce 20% earnings growth during the next several years.
ResMed shares are undervalued at 18.4 times next 12-month EPS compared to the company’s 10-year average P/E (price to earnings ratio) of 26.1. ResMed is a leader within a segment of the healthcare industry that is in its infancy. I expect the stock to advance to our recommended sell price within one to three years. Buy RMD now.
A smart tip.