Investors Wake Up to ResMed: Under the Radar

BOSTON (TheStreet) -- ResMed(RMD), a maker of medical equipment for diagnosing and treating sleep and breathing disorders, is a recurring name on the 52-week high list. The company's shares have soared 77% in the past year, outpacing U.S. indices.

Awareness of sleep apnea, a common, but pervasively undiagnosed disorder, is on the rise. ResMed estimates that 20% of the adult population suffers from some form of sleep apnea, with 13% experiencing mild and 7% suffering moderate to severe symptoms.

Corporate projections are often overstated, but there's reason to believe the epidemic is real and grossly undiagnosed. An alternative study projects that 6.5% of Americans exhibit some symptoms, but 85% to 90% are unaware of the disorder. Symptoms include drowsiness, headaches and impaired concentration. The internal effects are significantly worse, including hypertension, arrhythmia, metabolic disorders and stroke. New products ApneaLink Plus and the Swift FX and Mirage SoftGel masks receive favorable reviews.

The company's fiscal second-quarter profit increased 36% to $46 million, or 60 cents a share, as revenue grew 23% to $275 million. The balance sheet retained its liquid tilt, with $455 million of cash and $145 million of debt. ResMed's return on equity hit 14% in the latest quarter, exceeding the year-earlier figure, but trailing the industry average and the S&P 500 Index.

Sales in the Americas gained 20% to $148 million, while sales elsewhere jumped 27% to $127 million due, in part, to a weaker dollar. During the past three years, ResMed has increased revenue 14% annually, on average, and boosted net income 19% a year. Emerging markets present untapped growth. ResMed derives 54% of its sales from the Americas, 38% from Europe and 8% from the Asia-Pacific region. Around 59% of revenue stems from flow generators and the remainder from masks and accessories.

The sell-side is bullish on this mid-cap stock. Seven analysts advise purchasing shares while five advise holding them. UBS(UBS) expects ResMed to advance another 19% to $71.91. Our stock model rates ResMed "buy" and projects the stock will hit $78.99.

The stock's value is rich. It trades at a price-to-projected-earnings ratio of 22 and a price-to-cash-flow ratio of 24, 9.5% and 55% premiums to respective peer-group averages. A PEG ratio of 1.1 demonstrates an exorbitant cost relative to expected growth.