Like its cousin Respironics (NASDAQ:RESP), ResMed (NYSE:RMD) suffers from an all-too-common fate in med-tech land: It's a great company trading at a not-so-great price. Well, not so great if you want to buy shares, that is. I'm sure those who already own the shares think today's price is just nifty.
While there are peripheral competitors like Tyco (NYSE:TYC), Invacare (NYSE:IVC), and Vital Signs (NASDAQ:VITL), for all intents and purposes, the sleep apnea market is a duopoly between ResMed and Respironics. Better still, it's a fast-growing duopoly in a large market for a disorder that many people believe is still significantly underdiagnosed and undertreated.
And even more so than Respironics, ResMed saw a very strong December quarter. Sales were up 41% on strong domestic performance, including ongoing market share growth in the flow generator business. On the income side, we see strong growth in income from operations (up 44%) and net income (up 49%) on a pro forma basis.
Now, for those who didn't study Latin, pro forma basically means "excluding expenses we'd rather not have to mention, thereby making the results look better." In the case of ResMed, for instance, there was about $3.4 million in stock compensation expense and another $1 million in amortization that it would just as soon have you overlook. After all, net income growth is "only" 28% with those items included.
Jokes aside, ResMed is hardly the only company to emphasize pro forma numbers over GAAP numbers, and it's not as though the company's performance is bad on that GAAP basis.
One interesting point to ponder here is how much of this potential sleep apnea market is really accessible. If you study up on the disease, you read all about how many experts believe that today's market is roughly akin to an iceberg (i.e., the part we see is dwarfed by the part we don't). What remains to be seen, though, is how companies like ResMed can go about spurring the process of identifying those patients and getting them into treatment. After all, potential is worth something only if it can be tapped and exploited.
Much as I like the growth here, the stock valuation seems nutty to me. Even if you set aside free cash flow or structural free cash flow methodologies, a price-to-sales ratio of nearly 6 is a pretty steep price to pay on an historical basis (though in line with what Medtronic (NYSE:MDT) and St. Jude (NYSE:STJ) trade for today). As a result, I won't be looking to buy shares for my own account any time soon.
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Fool contributor Stephen Simpson has no financial interest in any stocks mentioned (that means he's neither long nor short the shares).
