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RMD reported first quarter net profit of US$80.9 million, which is a strong beat on the corresponding period of US$71.3 million (a 14% beat), with revenue up 5% to US$357.7 million from US$339.7 million last year. Earnings-per-share came in at 56 cents – also a strong beat on the 49 cents reported in the corresponding period.
The street estimates, however, were for an earnings-per-share read of 58 cents and revenue read of US$373.3 million. The soft revenue print to street estimates are contributed to increase competition, pricing discounts and some loss of market share in the lucrative masks division. What will also upset the market is the fact flow generators from sleep apnea only saw 5% growth, which produces around 35% of EBIT.
The market has reacted to the news with a -9% drop on the open. This is not surprising on a fundamental basis as the stock was trading at a 22 times price-to-earnings on consensus FY14 numbers. However I see the results as broadly in line with company expectations which have seen expected increased competition.
What is very positive from the numbers is gross profit margin, which is up 230 basis points on the corresponding, to 63.7%, and beat market expectations. The margins were a reaction to the lower AUD increased manufacturing from Singapore and a shift to higher end devices, which is a longer term strategy. These are longer-term positive and if the product mix shifts to high-end devices, RMD will see margin move higher still.
The ASX listing is up over 50% for the year and the US listing is up 37%. The momentum in the trade I believe will return, however near term trading will be weak. I suggest holding out of the trade until the interim momentum changes.
I see three to five days of selling before the stock is picked up. The upward trend that began in July last year has not been broken with today’s sell-off and if it holds the line, the reversal post the sell-off should see the stock head back towards $6.
Look to buy the dips on reversal signals; buying dips around 5.20 to $5.35 would be beneficial, with a stop loss at $5.15 and limit of $5.95.