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Morningstar | ResMed Set to Finish Fiscal 2019 Strongly; but Performance Already Baked Into Our Unchanged FVE. See Updated Analyst Note from 03 May 2019

Shares in ResMed are beginning to screen as overvalued following the release of third-quarter results. Revenue growth of 11% in the nine months ended March is broadly in-line with our updated full-year forecast of 12%. We pull back our forecasts for the core devices business, which slightly trailed our expectations, but our long-term estimates remain intact. ResMed has carved a narrow economic moat and commands a dominant position in sleep apnoea. We expect the firm can continue to bolster its share in this underpenetrated, and hence growing, market. We retain our USD 101 per share fair value estimate, while our fair value estimate for Australian CDIs increases 1% to AUD 14.40 on foreign currency movements.

We forecast the Software as a Service, or SaaS, segment growing at a low-double-digit CAGR over the five years to 2023. As expected, SaaS was the standout of the third quarter. However, representing 12% of total revenue over the quarter, the SaaS business is starting off from a small base. Revenue doubled over the prior corresponding quarter with full quarter contributions from the recent MatrixCare acquisition, closed in the second quarter, and HEALTHCAREfirst, which closed in the first quarter.

We expect the devices business to grow at a mid-single-digit CAGR over the five years to fiscal 2023. The segment’s results, which constitute a little over half ResMed's revenue, were less encouraging. With just 3% revenue growth over the prior corresponding period, or pcp, device sales underperformed our forecasts. Struggles were particularly pronounced in the Europe, Asia and other markets while the comparatively stronger U.S. dollar further dampened revenues. Recent digital health-related reimbursements in France and Japan, which brought forward device upgrades in previous quarters, caused slower growth in these countries in the last quarter.

Mask sales, representing 37% of revenue, continue to outpace devices across both regions with a number of recent new product releases. Masks are higher margin than the core devices business, and growing 10% on the pcp, leads to a positive mix shift. Accordingly, gross margin expanded 100 basis points to 59.2%. This brings margin for the nine months to March 2019 to 58.8%--tracking our full-year forecast of 58.5%.