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Sunday, 25 March 2007
ResMed (RMD) "Weekend Trading Portfolio Analysis"

 

RESMED (RMD) IS RATED A BUY

 

Hello Friends!  Thanks so much for stopping by and visiting my blog, Stock Picks Bob's Advice!  As always, please remember that I am an amateur investor, so please remember to consult with your professional investment advisers prior to making any investment decisions based on information on this website.

One of the things I like to do on this blog is to share with you my actual holdings in my Trading Portfolio, my actual trades, and the results of such activity.  I started this a bit over a year ago, realizing that I hadn't been keeping you all posted as well as I should on what my actual stocks I own have been doing, and how I have been managing with them.

Two weeks ago I wrote up my Quality Systems (QSII) holding.  Going alphabetically, I am up to ResMed (RMD) and shall try to update you on this position.  I had some interesting comments on that entry and they were not entirely without merit.  I should point out that all sales that I make have negative consequences of both the cost of the transactions (I use a discount broker but that is really necessary if you are going to make the many transactions that I make) and you also are going to incur tax consequences.  

Furthermore, I write this blog not trying to assert that this is the only way, or even the best way to invest.  I write this as my own personal journey through the investing world, sharing with all of you my thoughts and perspectives on investing.  There are many other smarter minds out there, there are other approaches to identifying stocks and averaging up on stocks or whatever.  This is merely my diary of my own technique, a technique that I have adopted after reading of many other approaches and experimenting in a mostly 'seat-of-the-pants' system of investing.  My disciplined approach has been working well for me.  I hope that all of you are able to learn from my successes and failures and utilize as many of my techniques as you find profitable.

I first discussed ResMed on Stock Picks Bob's Advice on December 5, 2003, when the stock was trading at $41.76/share.  This represents a price of $20.88 adjusted for the 2:1 stock split in October, 2005.  

I currently own 150 shares of ResMed (RMD) that were acquired 2/4/05, at a cost basis of $29.87/share. My original purchase was reported on Stock Picks on the same day, February 4, 2005, as 120 shares purchased at $59.67.   RMD had a 2:1 stock split on October 3, 2005, making my effective stock purchase price actually $29.87.

ResMed closed at $50.67 on March 23, 2007, giving me an unrealized gain on these remaining shares (I have sold portions of my holding as the stock has appreciated) of $20.80 or 69.6% on my current holding.  My over-all performance with this stock is lower, because I have taken smaller gains, at both 30% and 60% levels on portions of my original purchase. 

In fact, I sold 30 shares of my original holding (using my original strategy of selling 1/4th of my remaining shares at targeted appreciation points) on 9/27/05 at a price of $76.09/share, representing a gain of $16.42 or 27.5%, leaving me 90 shares before the 2:1 stock split.  Then of my 180 shares,  I sold another 30 shares of RMD on 5/5/06 at a price of   $47.47, representing a gain of $17.60 or 58.9% above my original cost.  

Going forward, my planned next sale would be 1/6th of my 150 shares or 25 shares at a 90% appreciation point or 1.90 x $29.87 = $56.75.  On the downside, I plan on selling all of my remaining shares if the stock should trace back to a 30% appreciation point (1/2 of my highest sale point of 60%) or 1.30 x $29.87 = $38.31/share.

So can I calculate what my actual return has been (still not taking into consideration tax issues) on both my realized and unrealized holdings?  To summarize, I purchased 120 shares of ResMed at $59.67 = $7,160.40.  I have sold two portions of this stock, 30 shares in 9/27/05 with proceeds of $2,329.25 (price of $38.82 adjusted for the 10/05 2:1 split), and 30 shares 5/5/06 with proceeds of $1,424.20 (price of $47.47), giving a sum of $3,753.45 of sales.  I have 150 shares remaining of RMD and with Friday's closing price of $50.67, that means I still have $7,600.50 of stock left.  Thus if I add together the $3,753.45 with the $7,600.50  = $11,353.95.  This represents a gain of $11,353.95/$7,160.40 = 1.586 or 59% appreciation on my original purchase.  This is less than the 69.64% appreciation on the remaining shares but reflects the shares already sold and is fairly close to that figure as well!

I hope this more clearly reflects my selling strategy for this stock.  I want things to be as transparent as possible with all of my discussions.  I am not trying to overstate my performance which I believe stands on its own just fine!

Let's take a little closer look at ResMed and see if it still deserves a spot on the blog.

What exactly does this company do?

According to the Yahoo "Profile" on ResMed (RMD), the company

"...engages in the development, manufacture, and marketing of products for the screening, treatment, and long-term management of sleep-disordered breathing and other respiratory disorders. It offers medical equipment for sleep-disordered breathing (SDB), which includes obstructive sleep apnea (OSA) and other respiratory disorders that occur during sleep. The company�s products include airflow generators; diagnostic products; mask systems; headgear; and other accessories, including humidifiers, cold passover humidifiers, carry bags, breathing circuits, Twister remote, the Aero-Click connection system, and the AeroFix headgear."

How did they do in the latest quarter?

On February 6, 2007, ResMed announced 2nd quarter results.  For the quarter ended December 31, 2006, revenue came in at $178.4 million, up 22% over the same quarter ended December 31, 2005.  Net income was $29.0 million, up from $22.3 million last year, and diluted earnings per share came in at $.37/share, up from $.30/share the prior year. 

The company came in a little light on revenue as analysts expectations were for revenue of $182 million.

How about longer-term financial results?

Reviewing the Morningstar.com "5-Yr Restated" financials on ResMed, we can see the beautiful progression in revenue from $204.1 million in 2002 to $607 million in 2006 and $675.5 million in the trailing twelve months (TTM).

Earnings have also steadily increased from $.55/share in 2002 to $1.16/share in 2006 and $1.32/share in the TTM.  During this time, while revenue has been up over 200% and earnings have climbed about 100%, the number of shares outstanding has grown just a little over 20% from 64 million to 77 million in the TTM.  This is an acceptable dilution of shares from my perspective.   No dividends are paid.

Free cash flow has been a little erratic with $19 million in 2004, growing to $31 million in 2005, then falling to a negative $(4) million in 2006, but rebounding to a nice $27 million in the TTM.

The balance sheet is solid with $254.6 million in cash and $336.3 million in other current assets.  This total of $590.9 million can easily cover both the $163.7 million in current liabilities as well as the $117.9 million in long-term liabilities combined.  Looking just at the current ratio, comparing the total current assets of $590.9 million to the $163.7 million in current liabilities yields a very strong ratio of 3.61. (Generally I consider current ratios of 1.25 or higher as being 'healthy' all things considered.)

What about some valuation numbers?

Examining the Yahoo "Key Statistics" on RMD, we find that this is a mid-cap stock with a market capitalization of $3.89 billion.  The trailing p/e is a bit rich at 38.18, with a forward p/e (fye 30-Jun-08) estimated at 25.72.  The growth is expected to be vigorous going forward with a PEG (5 yr expected) estimated at 1.46.  (PEG's of 1.0 to 1.5 are reasonable from my perspective.)

According to the Fidelity.com eresearch website on RMD, the Price/Sales (TTM) for RMD is a very reasonable 5.65 relative to the industry average of 30.09.  Again, according to Fidelity, the Return on Equity (TTM) is just a bit under the industry average of 15.87%, with RMD coming in at 13.64%.

Finishing up with Yahoo, we find that there are 76.80 million shares outstanding with 74.38 million that float.  Currently, there is a bit of a significant short interest on this stock with a short ratio of 5.3 trading days or 4.8% of the float.  I generally use 3 days for my own idiosyncratic cut-off for significance.  If the company continues to report good news, these short-sellers may well be 'squeezed' as they scramble to cover their 'shorts' buy buying shares on the open market.  This could add to any price rise if such good news is forthcoming.

No dividend is paid, and as I noted above, the last stock split was a 2:1 split on October 3, 2005.

What does the chart look like?

If we review the "Point & Figure" chart on ResMed from  StockCharts.com above,  I think we can see that except for technical weakness back in January, 2002, through July, 2002, when the stock declined from $25 to a low of $12.50, the stock has been on a 'tear' with steady price appreciation the past four or five years.  This has been a very strong stock and a strong chart to match!

Conclusion:  What do I think?

Well, I still like this stock a lot.  In fact, I own shares in this stock!  And you should certainly take that into consideration.  I don't talk much about my own personal life, but I can tell you that I personally use one of these CPAP machines and have slept better (when I am not blogging!) and have let my wife sleep better as well!  The stock itself has been kind to me and represents the kind of stock I believe belongs in my portfolio.

The last quarter was solid.  The past five years have been terrific.  Valuation is a bit rich but with the steady performance of this stock, may well be worth the premium. 

Thanks so much for stopping by and visiting!  If you have any comments or questions, please feel free to leave them on the blog or email me at bobsadviceforstocks@lycos.com.  If you get a chance, be sure and visit my Stock Picks Podcast Website.  Hopefully, I shall also get a chance to write up and report on a new stock on the Podcast this week!

Bob 


Posted by bobsadviceforstocks at 10:52 PM CDT | Post Comment | Permalink
Updated: Tuesday, 27 March 2007 3:20 PM CDT

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