Sweet Air Around ResMed

After having given some air time to rival Respironics (NASDAQ:RESP) about a month ago, it seems only fair to give a little attention to its smaller rival, ResMed (NYSE:RMD). Like Respironics, ResMed is focused on treating respiratory problems, particularly sleep-disordered breathing (which includes sleep apnea and other ailments).

Results for the company's fiscal fourth quarter might induce a little heavy breathing for growth investors. Sales were up 35%, as reported, and when you exclude the impact of acquisitions, the growth rate was still a strong 25%. While operating margin (adjusted for acquisition expenses) slipped a bit because of higher selling, general, and administrative expenses, adjusted earnings per share nevertheless grew at a 33% clip for the quarter.

Even though sleep apnea is still thought to be widely underdiagnosed, the market is still growing at a 15% to 20% clip today and doesn't seem to be significantly slowing down just yet. From the perspective of a medical device company, sleep apnea is a good business. The condition is treatable, but not curable, and insurers are generally willing to pay up for treatment because untreated sleep apnea can lead to a variety of even worse health problems. So once a patient is diagnosed and accepts treatment, he or she generally becomes a predictable source of revenue.

Better still, ResMed management is not just resting on its laurels. The company recently made two acquisitions aimed at expanding its European presence. Also, management has a stated goal of spending about 6% to 7% of revenue dollars on research and development. That's not a tremendously high number by the standards of med-tech, but it is double the percentage of sales that Respironics now spends.

That said, there are some risk factors that Fools must consider. First, this is essentially a one-market business, and ResMed goes up against larger competitors like Respironics and Tyco (NYSE:TYC) every day. Second, the company's stock-based employee compensation expense is higher than I'd like at more than 15% of net income. Finally, the stock itself is not cheap no matter if you use a price-to-earnings approach, enterprise value to free cash flow, price/sales, or P/E to growth.

With a fairly high valuation already in place, I wouldn't be buying these shares. By the same token, though, with a strong and growing business in place, I wouldn't be selling them if I had already bought them at a lower price. Value-conscious investors may want to wait for a "bad hair day" to buy in, but it looks like business will have shareholders breathing freely for a while yet.

For more med-tech Takes:

• Possis' Possible Pitfalls
• Respironics Still Breathes Freely
• ANSI's Got the Juice
• Investing in Controlling Obesity

Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).