Earnings growth jolts ResMed shares out of slumber

Brian Robins January 28, 2012

RESMED shares closed sharply higher yesterday, touching three-month peaks, after a return to earnings growth in the December quarter.

Shares in the medical equipment maker have been out of favour over the past few months owing to weak first-quarter earnings as well as concerns over the effect of the strong Australian dollar on its margins, since ResMed produces the bulk of its products locally.

Earnings per share for the December quarter rose to US42¢ (39¢) from US37¢, ''comfortably'' beating the consensus analyst forecast of US38¢ a share, the ResMed chairman and chief executive, Peter Farrell, said.

For the first half, earnings per share edged up to US75¢ from US73¢. Quarterly revenue increased to $US332 million from $US305 million.

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However, underlying earnings were squeezed, with income from operations falling to $US67.2 million from $US69.9 million a year earlier, and bottom-line earnings benefiting from a sharp lift in ''other'' income to $US8.5 million from $US3 million. This gain mostly reflected currency hedge contracts, the company said.

Earnings benefited from a return to growth in US sales of its flow generators, which rose 4 per cent following a sluggish period.

Revenue in the Americas rose 12 per cent to $US182.5 million year-on-year, with revenue outside of the Americas rising a more modest 5 per cent to $US150.2 million.

David Stanton, an analyst at Nomura Australia, said: ''Overall, we continue to see upside from ResMed's medium- and longer-term dynamics in terms of growth from the rollout of home sleep testing in the US and increased focus on associated diseases to obstructive sleep apnoea.''

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During the quarter, ResMed bought back 4.1 million of its shares at a cost of $US110.5 million, helping to lift earnings per share.

''We believe that the stock is incredibly undervalued,'' Mr Farrell told analysts. ''There is another 14 million shares approved for buyback and we believe the stock is cheap and we are putting our money where our mouth is."

The company's net cash reserves declined to $US496 million from $US635.3 million at the end of June, reflecting its share buyback program. Research and development spending totalled $US27.2 million in the quarter.

''The weak euro is likely to be a bit of a headwind for us,'' Mr Farrell said. ''The flow generator market remains challenging.''

The shares gained 19¢ to $2.73.