The share price of ResMed (RMD) has shed almost 10 per cent since the start of August. It’s now trading on a P/E of ~20x, compared to ~24x around the time of their fiscal year result. There are however some concerns in the market about an expected impact on gross margins from pricing pressure from its US customers. There was little gross margin growth in FY16, and this, along with new products/positive testing results seem to be the key catalysts for the stock – but the 1Q17 results (due in October) would provide a clearer picture; so investors would be wise to until then rather than buying now purely on weakness. In regards to testing results, there was a recent result showing that CPAP therapy does not prevent cardiovascular events in obstructive sleep apnoea (OSA).
Looking at the chart, we are can identify some key levels that RMD needs to respect. In one of our weekly reports in July, we identified a breakout from some key resistance and RMD went on to quickly rally about 10 per cent. It is obvious now that the recent pullback is seeing the RMD share price come right back to that breakout area. This means that we should expect some strong support to come in shortly near $8.20. This is the level that we want RMD to hold onto. If it can impress the market with their 1Q17 results, then that could provide a nice springboard for the stock. Otherwise we may see RMD move lower down towards the next level of support near $7.80.
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