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Why ResMed Stock Exploded Higher This Week

By George Budwell – Jun 18, 2021 at 8:26AM

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A competitor's misfortune could be a big opportunity for the medical device giant.

What happened

Through Thursday's close, shares of the medical equipment company ResMed (RMD -0.37%) were up by a healthy 10% so far this week. ResMed's stock is marching higher this week in response to Koninklijke Philips' (PHG -0.33%) decision to voluntarily recall approximately 3.5 million ventilation devices for treating sleep apnea.

Philips is recalling the devices over the use of a polyester-based polyurethane (PE-PUR) sound abatement foam that could be toxic if inhaled or ingested. ResMed stands to benefit financially from this massive recall, given that sleep apnea devices are one of the company's core product segments. 

A patient testing their lung capacity at a doctor's office.

Image source: Getty Images.

So what

Investors likely bid up ResMed's stock by double digits this week due to the size of the recall. The bottom line is that Philips won't be able to fix this widespread sound abatement foam problem quickly -- potentially opening the door for ResMed to gain a major slice of the market over the next six to 12 months.

The real question, though, is whether ResMed can hold onto these commercial gains over the long term. The medical device company's stock, after all, is now trading at over 43 times forward earnings following this 10% bump in its share price, implying that investors are indeed expecting ResMed to capitalize on Philips' misfortune in a big way.    

Now what

Is ResMed's stock still a buy? While medical device companies often sport eye-popping valuations, ResMed's stock now appears to be on the expensive side no matter how you slice it. Apart from its hefty forward-looking price-to-earnings ratio, the healthcare company's stock is also trading at over 11 times 12-month-trailing sales. That's nearly double the industry's historical average. Bargain hunters, in turn, might want to wait for a more compelling entry point before buying shares. 

George Budwell has no position in any of the stocks mentioned. The Motley Fool recommends ResMed and ResMed Inc. The Motley Fool has a disclosure policy.

Stocks Mentioned

ResMed Stock Quote
ResMed
RMD
$229.34 (-0.37%) $0.86
Koninklijke Philips Electronics NV Stock Quote
Koninklijke Philips Electronics NV
PHG
$14.99 (-0.33%) $0.05

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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