We recently researched ResMed (ASX:RMD) in The Dynamic Investor following the release of its latest quarterly result (3Q25). RMD reported a strong 3Q25 result, which was also above consensus estimates. Importantly, the results highlighted improved fundamentals. These include expanding GPM, potential for higher share in devices and masks, a positive operational outlook and reduced risk from tariffs. Accordingly, we consider whether current levels are attractive.

About ResMed

ResMed provides products for the treatment of sleep-related breathing disorders, including sleep apnea, Chronic Obstructive Pulmonary Disease (COPD), and other respiratory conditions. The product portfolio has traditionally included airflow generators, nasal masks and pillows that introduce airflow. In recent years, the product portfolio expanded to offer digital solutions. The Company now has three reporting lines by product: Masks, Devices and Software-as-a-Solution (SaaS).

Key Fundamental Drivers

Plans to Increase Market Share

US masks growth remains ahead of industry growth. This is underpinned by re-supply initiatives, with scope for further growth. Sales growth for US masks in the 3rd quarter of financial year 2025 (3Q25) was +13% and represents a step-up from recent periods (+12% in 2Q25 and +10% in 1Q25). However, market share gains and the Company’s continued focus on growing resupply rates underpin expectations for augmented growth rates in coming quarters.

While share gains for masks in the Rest of World segment are slower than in the US, it is reflective of a smaller installed base and more limited resupply – but is expected to eventually track closer to the rate of share gains in the US.

RMD have highlighted that the market is expected to grow by around mid-single and high-single digits for devices and masks, respectively. The Company intend to grow above market. Management have outlined two primary methods to increase patient diagnosis and device adoption:

i. Continual Medical Education (CME) to teach physicians the benefits of CPAP therapy with the goal of increasing physician prescription for devices. RMD plans to invest directly into the physician education programs.

ii. Streaming advertising in select cities directed towards “sleep health concerned consumers”. The focus here is on locations that are metro, GLP-1 prescription dense and which have no large sleep labs.

Gross Profit Margin Continues to Expand

The highlight of the 3Q25 result was the expansion in Gross Profit Margin (GPM). GPM in 3Q25 increased by 70 basis points compared to the prior quarter (2Q25) and 140 basis points compared to the prior corresponding period (3Q24). GPM for 3Q25 was 59.9%, which was at the top end of guidance. The Company provided guidance for the 4Q25 GPM to be similar to 3Q25. However, foreign exchange spot prices now represent a tailwind that could take GPM above 60%.

The drivers of the expansion in GPM included: i) Manufacturing efficiencies via overhead recoveries; ii) Distribution and freight savings; iii) A more favourable product mix, notably the transition from AirSense 10 to the higher-priced AirSense 11; iv) Procurement of component costs leveraging RMD’s scale; and v) Product mix, as masks growth (which is higher-margin) exceeded device growth.

With RMD is at the top end of guidance, management have a pipeline of margin initiatives that should continue to build on its scale to deliver its intention to exit FY25 on a higher GPM than it entered FY25. Key initiatives that are expected to drive further GPM expansion include: i) Utilising the manufacturing capacity expansion undertaken in recent years, ii) Disciplined labour costs control and focus on optimising raw materials and iii) Further benefit from product mix.

The forecast for further GPM expansion, coupled with relatively low selling, general and administration expenses (as a % of sales) is expected to benefit future operating margin. In context, operating margin in 3Q25 was 34.4% and expanded by 40 basis points compared to the 2Q25 and 150 basis points compared to 3Q24.

Minimal Impact Expected from US Tariffs

Historically, RMD devices and masks have been exempted from US tariffs. In early April 2025, RMD received confirmation from the US Customs and Border Protection office that its tariff exemptions under the Nairobi Protocol continues to apply. (The Nairobi Protocol is an international provision in the Harmonized Tariff Schedule of the US outlining duty exemptions for medical devices for the treatment of chronic conditions or humanitarian purposes)

As such, the Company expects minimal impacts from the introduction of US tariffs. Some diagnostics may be subject to tariffs but they appear “very manageable” and can be offset through continued automation and US sourcing.

Balance Sheet Optionality

RMD has a strong net cash position (US$260m as at 31 March 2025) and substantial funds (US$1.5b) available for drawdown via existing facilities. This provides the Company with the scope to pursue Merger & Acquisition opportunities as well as further share buybacks. RMD repurchased US$75m shares in 3Q25 under their share buyback program and expects to increase share repurchase to US$100m per quarter from 4Q25.

Fundamental View

Despite an improved fundamental outlook, the market may want to see another quarterly result that exceeds expectations before re-rating the shares. To this end, RMD has a recent history of disappointing market expectations on key measures such as GPM – to which the shares generally react quite negatively.

Charting View

RMD managed to retest the 2021 highs at the end of January this year but it reversed sharply. With the broader market bouncing in early April, RMD has managed to bounce as well in the short-term. It then approached a major resistance level near $39 (blue line). In our recent research, we noted that there was good chance that RMD consolidates and any dips closer to $35 would be a better entry point. It managed to do that this week so for now it looks like RMD can head higher from here.

 

Michael Gable is managing director of Fairmont Equities.

 

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