ResMed's ASX shares hit record on earnings beat, but is the future still bright?

ResMed, pardon the pun, is giving both its customers and investors a good night’s sleep – and today’s numbers proved it again. The company has developed a habit of beating earnings and gross margin expectations, and its latest results were no exception.

The sleep and respiratory tech giant has successfully weathered the storm of negative sentiment that swept through the sector in 2023-24 following the rise of GLP-1 weight loss drugs.

As CEO Mick Farrell said almost two years ago: "At the aggregate level, we're seeing no change there. We are seeing more patients coming into the funnel."

His confidence has proven well-founded, with ResMed capping off FY25 with strong momentum across key metrics.

Now in a net cash position and delivering consistent growth, investors are clearly taking note - ResMed shares surged to an all-time high above $43 in early trading, with the stock now up more than 30% over the past year.

We speak to Elston Asset Management's Portfolio Manager Bruce Williams about this quiet healthcare compounder’s latest results, margin forecasts, and what he thinks about the company's valuation.

ResMed's FY25 results vs Citi forecasts

• Revenue up 10% to $5.14 billion vs. $5.15 billion ests (0.1% miss)
• Full-year gross margin up 270 bps to 59.4% vs. 59.4% ests (in-line)
• Net income up 37% to $1.40 billion vs. $1.37 billion ests (2.1% beat)
• Earnings per share up 37% to $9.51 vs. $9.49 ests (+0.2% beat)
• Quarterly dividend up 13% to 60 cents per share
• Full-year dividend up 11% to 219 cents per share vs. 219 cents ests (in-line)

I think the standout was gross margin. Markets tend to be quite accurate, but Q4 gross margin was up about 230 basis points - a very strong finish to the year. That big increase in Q4 was ahead of consensus, and that’s probably where the beat came from.

Were there any surprises in this result that you think investors need to be aware of?

It really comes back to margins again. It’s good-quality management when they're growing reasonably strongly but containing costs at the same time. Looking at the broader picture, top-line revenue was pretty strong across all geographies and business segments - not just the sleep division but the software-as-a-service side as well.

But what stood out was that a lot of the gains came from structural cost initiatives. They specifically mentioned procurement, platform transition, and logistics. 

They’re growing well while watching costs, and often that's a difficult balance to make.

The company guided to gross margins of 61–63%, driven by cost optimisation and new product launches. Was this a noteworthy development?

I was a little surprised by that. Not only is the margin a function of cost efficiency but their overall margins are also a function of their product mix. The base CPAP machines are lower margin, while accessories like masks carry higher margins.

And so, they must be forecasting stronger growth in the higher-margin segment, which is the accessories. They’ve sat in the high 50s for quite some time, and now they’re really kicking on.

That implies not just a more favourable mix, but also potential operating leverage from SG&A expenses and more efficiency on the growth side. That's certainly a more positive outlook from a margin perspective than what we've had in a while.

Would you buy, hold or sell ResMed off the back of this result?

I think the valuation you are paying is reasonably full, but I think they are executing and they have quite a long growth runway in front of them. 

The market they operate in is still underpenetrated. Even with GLP-1 drugs reducing some of the overall opportunity, sleep apnea remains a very large and underdiagnosed space. So I’d call it a buy.

That said, I’d prefer to buy it on a bit of a pullback. But when a company is executing like this, I’m not sure if you’ll get one.

Are there any risks investors need to be aware of?

Yes, a few.

The biggest is the advancement of GLP-1 drugs. They’re currently injectables, but oral versions are in trials. The speed at which these drugs are adopted could be a risk.

Another potential risk is that most medical providers are largely or partially funded by governments and we've seen a number of instances where the government in question says 'we're not going to rebate the full amount for your product' - which puts more of the cost on the end user.

There’s also a valuation concern. Relative to its own history, at a premium to historical multiples.

Lastly, execution in diagnostics. They’re investing to scale VirtuOx and NightOwl, which aren’t part of the core CPAP business. That segment is growing, but it's still early and scaling it is key.

From 1 to 5, where 1 is cheap and 5 is expensive, how much value are you seeing on the ASX today?

I’d say between 3.5 and 4, if I had to be specific.

Any final thoughts?

It was a very good result. The stock had previously suffered a multiple contraction due to the threat of GLP-1 drugs, but ResMed maintains that these drugs could actually lead to increased diagnosis, not less. They see it as complementary rather than competitive.

How that plays out long term remains to be seen. Our valuation horizon is about three years, though it may extend further. But it’s something we’ll continue to monitor.