Analysts explain ResMed share tumble

Investors have lost patience with companies failing to deliver on expectations, analysts said today (Monday, May 6), with ResMed the latest stock hit by their wrath.

The developer of sleep disorder devices continued its slide, after plummeting 13.6 per cent on Friday on the back of a profit warning.

The stock hit a low of $4.73 after chairman and CEO Peter Farrell suggested it would not be able to meet its fourth quarter earnings forecast.

Farrell said changes in Germany's healthcare policy, where ResMed reaps about 20 per cent of its sales, had watered down orders for the company's equipment, adding that, "if current uncertainties in the German sleep-disordered breathing market continue, it will be a challenge for the company to meet the [research group] First Call consensus earnings per share estimate of 30 cents for the June quarter."

A healthcare and biotech analyst with Assirt Equities Research, Chris Kallos, said the sell-off was a knee-jerk reaction on the heels of other recent negative surprises in the sector such as Mayne Group's earnings revision in April.

"There has been increased scepticism about companies with long-term growth rates factored into their valuations against a macro environment where bond rates are rising," Kallos said.

"The Mayne announcement seemed to trigger negative sentiment across the healthcare sector and there is a perception of misinformation from management in the sector."

Another analyst, who did not wish to be named, said risk-averse investors were severely punishing the sector's stocks, as evidenced by falls in CSL and Cochlear on Friday.

"It's definitely sentiment-driven," the analyst said, adding that there was a belief that ResMed's fall had been overdone by the market.

"People, I think, are not as tolerant now for management being so sure of themselves and then revealing changes that make the share price dive."

But UBS Warburg analyst John Deakin-Bell said he believed such incidents were fairly isolated and driven by the stocks themselves.

"Stocks on high multiples that give disappointing numbers are more exposed to the market," Deakin-Bell said.

"In this current market environment, if stocks on a reasonably high EPS (earnings per share) miss their numbers it is common to see them fall by 10 to 15 per cent or beyond."

He said ResMed's fall was probably more a reflection of overseas selling coming through and selling by hedge funds operating on different criteria to fundamental investors.

'Chronic over-achiever'

Kallos said ResMed's punishment could also be a result of the fact the company was a "chronic over-achiever".

"It has had 27 successive quarters of matching or exceeding forecasts, but this time around for the first time they have had a 1 cent difference (in third quarter EPS) and then the CEO said it would be a challenge to meet the 30 cent earnings per share," he said.

"When you look at the numbers there's very strong growth in the company, with 25 per cent growth in the US and 22 per cent internationally. Despite these strong results, people are just nervous about the whole sector."

He said Assirt had conservatively readjusted its figures for ResMed and expected its German market to remain under pressure for the next couple of quarters despite new products coming through.

"This obviously highlights the importance of communicating to the market," Kallos said.

"If there are going to be material changes to the market that company operates in, it is of benefit in the long terms to keep the market informed."

Merrill Lynch analyst Michael Carmody said other stocks in the sector should take note that if a company failed to deliver on expectations in the current environment, the market was likely to respond swiftly.

In ResMed's case, he said, the market appeared to have lost faith in the business model the company had established, contributing to the magnitude of the fall.

"The market has over-reacted to the information it received on Friday and we'd suggest that despite the risk of further falls, we think the current fall is unwarranted relative to the news."

At the time of writing, ResMed was trading 4.6 per cent lower at $5.15 on a turnover of almost 2,300,000 shares. This compares with a share price of $6.25 before the announcement last Thursday.