ResMed

ResMed grew fiscal 2026 EPS 17% to USD 11.2. Management guides to 12% to 14% core EPS growth in fiscal 2027. Shares fell 8%.

Why it matters: Excluding the recalled Astral ventilator, guidance implies fiscal 2027 revenue growth of about 6%-8%. This meets our forecast but undershoots management's five-year ambition for high-single-digit growth. Remaining EPS growth is mostly buyback accretion. ResMed targets USD 1.5 billion of repurchases in fiscal 2027, cutting our forecast share count by 5%. While only marginally accretive to fair value, it's a sensible use of capital with shares this cheap. After removing the disposed MatrixCare business, our forecasts stand. We expect revenue to reaccelerate, averaging 8% a year to fiscal 2030, as wearables pull undiagnosed patients into treatment.

The bottom line: Our fair value estimate for ResMed rises 3% to USD 300, mostly due to time value of money. Our AUD valuation increases 7% to AUD 43, the difference being a weaker AUD. Shares are undervalued. We differ from the market on continuous positive airway pressure adoption and the GLP-1 threat. Sleep apnea is driven by age, sex, and anatomy as well as weight, so remission after major weight loss is usually partial. Most patients also stop the drugs within a year. With the Apple Watch cleared to flag suspected sleep apnea, and fewer than 20% of US sufferers diagnosed or treated, this is a significant counterbalance to the GLP-1 threat.

Between the lines: ResMed is lifting prices, a break for a firm that has preferred to grow margins through volume. Charitably, this is ResMed flexing pricing power, supporting our view that a brand intangible underpins its narrow moat. But it could indicate management is concerned volume won't drive the scale efficiencies needed to meet margin targets. We don't read too much into one result. But growing reliance on price over volume could be a sign that GLP-1s are impinging on CPAP adoption. If it continues, we will reassess that threat.

Our USD 300 fair value estimate factors in 8% revenue growth in a typical year and an operating margin of 36% by fiscal 2031. ResMed has proved it can realize scale efficiencies, with operating margin expanding to 36% in fiscal 2026 from 22% in fiscal 2011. We forecast gross margin to continue expanding to 63% by fiscal 2031 from 62% in fiscal 2026, delivering EPS growth of 9% on average over our five-year forecast period.

Our forecast five-year revenue CAGR for the Americas, excluding software, is 8%, contributing 61% of group revenue by fiscal 2031. We forecast a five-year revenue CAGR of 7% for US device sales, largely consistent with the historical run rate. This run rate shows no sign of slowing due to increased diagnosis rates in a structurally growing market. Our growth forecasts reflect key tailwinds including the strength of its flagship product, AirSense 11, improving OSA diagnosis rates, and Philips still working through the terms of its consent decree in fiscal 2027. While affected customers can wait for a replacement, we think ResMed will see considerably elevated demand from a portion of these customers switching, as well as new customers doubting Philips’ reputation. We also forecast a five-year revenue CAGR of 9% for US masks and accessories versus its 12% trailing five-year growth. This reflects our continued confidence in ResMed maintaining higher adherence rates with its cloud-connectable devices, and in turn, more frequent resupply sales as physicians remind patients when replacements are due.

Our forecast five-year revenue CAGR for other markets is 7%, contributing 31% of group revenue by fiscal 2031. Despite greater market potential, we expect growth to slightly lag the Americas, given that it is more fragmented and experiences slower replacement rates on masks and accessories. We forecast the retained software business to grow 8% a year, though the reported segment will decline in fiscal 2027 as MatrixCare exits.

We award ResMed a narrow Morningstar Economic Moat Rating based on switching costs and intangible assets, which have helped the company achieve high customer adherence rates and above-average industry growth.

In fiscal 2020, both ResMed and Philips reported selling over 10 million total cloud-connectable medical devices globally to date. In fiscal 2021, ResMed crossed the 15 million mark. These newer-generation devices enable physicians to remotely monitor the patient’s usage and breathing performance, entrenching ResMed as a preferred provider with all three users of the data. For the patient, the device feedback encourages usage and allows them to get individualized care from the physician, leading to better clinical outcomes. For the physician, trust in recorded data and growing familiarity with the software are likely to reduce switching to a different provider. For the payor, evidence of patient compliance informs continued reimbursement support. The duopolistic nature of the market is also in the best interest of durable medical equipment suppliers as it limits the number of device manufacturers they deal with. These factors have contributed to ResMed reporting up to 87% adherence rates when the physician is using its cloud-based patient monitoring system, AirView, compared with the estimated industry average adherence rate of 50%. A higher adherence rate benefits both device upgrades as well as masks and accessories revenue as the physician reminds the patient of when they should be replaced. ResMed typically earns 40% of group revenue from the resupply of masks and accessories. Although these are interchangeable with other brands, competitors would be challenged to offer original products that are comparable in quality and comfort without infringing on ResMed’s plethora of patents, while also having to compete with its entrenched relationships.

ResMed’s intangible assets, namely its brand and patent portfolio, have also contributed to above-average industry growth and helped maintain its commanding market share. ResMed typically spends roughly 7% of revenue on research and development each year, which has ensured consistent product launches. Despite growing off a much smaller base, Fisher & Paykel’s competing homecare segment has a trailing five-year revenue CAGR of 5%, lagging ResMed’s 10% over the same period. We think ResMed’s intangible brand has also enabled significant price premiums over less well-known peers. While Philips and ResMed are comparatively priced, we estimate ResMed’s pricing to be roughly 15% higher than the remaining peer average across the automatic positive airway pressure device category and 30% higher in the CPAP category. This may reflect higher reimbursement support. In addition, we think ResMed’s patent portfolio of over 8,200 granted or pending patents will likely assist ResMed in maintaining its market share, with less than one-third expiring in the next five years.

Due to its significant market share and high gross margins in a structurally growing industry, ResMed has posted an average return on invested capital of 20% over the last decade. We anticipate the company’s ROIC to far exceed its weighted cost of capital of 7.4% over our explicit forecast period, even in our bear-case scenario.

The long-term growth opportunity for respiratory homecare devices is sizable, as both developed and emerging markets are still significantly underpenetrated.

The focus on cloud-connected devices has led to increased adherence, supporting both reimbursement rates and the resupply of masks and accessories.

ResMed stands to benefit from Philips’ significant product recall and the launch of its new flagship product, AirSense 11.

Market share gains from Philips’ product recall may be limited as affected customers can wait for a replacement unit, purchase an alternative Philips product, and ResMed’s supply chain may be constrained.

Reimbursement rates and pricing are under threat as CMS continues to seek savings in the Medicare program, and newer treatments such as neurostimulation implants are emerging.

ResMed is largely unproven in homecare business management software, an area it is currently directing significant capital to and currently achieving organic revenue growth of midsingle digits.