While Fools should generally take the opinion of Wall Street with a grain of salt, it's not a bad idea to take a look at particularly stock-shaking analyst upgrades and downgrades -- just in case their reasoning behind the call makes sense.
What: Shares of ResMed (NYSE: RMD ) slipped 1% today after Northland Capital downgraded the medical equipment distributor from market perform to underperform.
So what: Along with the downgrade, analyst Suraj Kalia reiterated his price target of $40, representing about 20% worth of downside to Friday's close. So while momentum traders might be attracted to ResMed's price strength in recent months, Kalia's call could reflect a sense on Wall Street that the company's operating risks are being largely overlooked.
Now what: According to Northland, ResMed's risk/reward trade-off is rather unattractive at this point. "Our recent checks in the CPAP space highlight numerous forces that will, over time, work in concert to squeeze margins and top-line growth," said Kalia. "As we have said in our initiation report (10/07/13), ResMed's model is highly sensitive to operating margins, and every 100 bps reduction in margins reduces equity value/share by $2. We believe consensus forward estimates, especially margin profiles are unrealistic." When you couple that downbeat view with ResMed's steep-ish 20-plus P/E, it's tough to disagree with Northland's bearishness.
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