Wolfe Research Lowers ResMed Rating Amid Market Competition

Wolfe Research Downgrades ResMed's Stock Rating

Recently, Wolfe Research made a significant adjustment to its outlook on ResMed (NYSE:RMD), reducing its stock rating from Peer Perform to Underperform. As part of this evaluation, Wolfe has set a new price target at $180.00, indicating a cautious shift in perspective regarding ResMed's future earnings potential and associated risks in the marketplace.

Reasons Behind the Downgrade

The downgrade is primarily driven by emerging competitive pressures that ResMed is likely to encounter over the next few years. One of the primary concerns highlighted by Wolfe Research involves Eli Lilly's anticipated introduction of a new drug aimed at obstructive sleep apnea, which could significantly affect ResMed's market share in continuous positive airway pressure (CPAP) devices. Wolfe's analysis suggests that the overall addressable market for these CPAP devices could potentially decline by 15% to 25% due to this new competitor.

Valuation Metrics and Market Outlook

Wolfe Research's newly established price target of $180.00 is determined by applying a 20 times price-to-earnings (P/E) multiple to estimated earnings per share (EPS) of about $9.00 for the next twelve months (NTM). This multiple sits at the upper end of the normal 15 to 20 times range typically reserved for companies with mid-single-digit growth trajectories. The cautious valuation reflects the anticipated decline in high-single-digit growth expectations for ResMed, given looming market disruptions.

Impact of Eli Lilly’s Competition

The expected impact of Eli Lilly's new GLP-1 medication, tirzepatide, on the CPAP sector is significant. This medication is projected to launch with indications for treating obstructive sleep apnea in the upcoming years, specifically in the 2025-2026 timeframe. Wolfe’s analysis suggests that market participants may need to revise their growth expectations for ResMed from a high-single-digit growth rate to a more tempered mid-single-digit rate.

Recent Company Developments

Alongside this downgrade, ResMed has also been subject to other changes in stock ratings. Investment firm Needham has recently downgraded its outlook from Buy to Hold, citing similar concerns about the competitive landscape and projected slower growth in fiscal year 2025. Conversely, William Blair has maintained an Outperform rating, predicting an overall increase in sleep apnea and CPAP patients by the year 2025.

Financial Performance Highlight

Despite these evolving challenges, ResMed has shown resilience with robust financial performance. In the fourth quarter of its fiscal year 2024, the company recorded a 9% increase in overall revenue, totaling $1.22 billion, driven primarily by strong sales of CPAP masks within the United States market. This positive performance has led CLSA to adjust its price target on ResMed to AUD35.00, while RBC Capital increased its target to AUD206.00, even amidst concerns of potential long-term competition.

Positive Actions for Shareholders

In addition to revenue growth, ResMed has made progressive moves, including a 10% hike in its quarterly dividend for shareholders and a reduction of $300 million in its debt load. The company has also initiated a share repurchase program amounting to 232,000 shares for $50 million, signaling strong capital management and a commitment to returning value to its investors.

Current Market Position and Future Outlook

As investors analyze Wolfe Research's decision to downgrade ResMed (NYSE:RMD), it is crucial to consider the company's financial health and market position. With a market capitalization of $36.86 billion and a P/E ratio at 36.09, ResMed holds a premium valuation, indicative of high expectations concerning future earnings. Notably, ResMed has demonstrated consistent revenue growth of 10.95% over the past twelve months as of Q4 2024, suggesting a solid and resilient operational framework.

Commitment to Shareholder Value

The firm's historic ability to sustain dividend payments for 13 consecutive years highlights its ongoing commitment to delivering value to its shareholders. Analysts projecting positive upward revisions in their earnings forecasts for the upcoming period can foster a sense of optimism regarding ResMed's future earnings potential. Nevertheless, trading at a high earnings multiple may still be justified due to its stable performance and sound financial management principles, which include proper handling of debt and adequate liquidity to meet short-term obligations.

Frequently Asked Questions

What led to Wolfe Research's downgrade of ResMed's rating?

The downgrade was primarily due to anticipated competitive pressures from Eli Lilly's new medication for obstructive sleep apnea, potentially impacting ResMed's market share.

What is the new price target for ResMed set by Wolfe Research?

Wolfe Research has set a new price target for ResMed at $180.00 after downgrading its stock rating.

How has ResMed performed financially in recent quarters?

In the fourth quarter of fiscal year 2024, ResMed reported a 9% revenue increase, reaching $1.22 billion, driven by strong mask sales.

What recent actions has ResMed taken to enhance shareholder value?

ResMed increased its quarterly dividend by 10%, reduced its debt by $300 million, and repurchased shares worth $50 million.

How does ResMed's current P/E ratio reflect market expectations?

ResMed's current P/E ratio of 36.09 indicates a premium valuation, suggesting high investor expectations for future earnings performance.

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