ResMed (RMD) is a fantastic company, with some of the most exuberant earnings expectations I’ve seen. On our calculations, c20% eps growth is required each year every year just to produce a market like rate of return (we use 7%, as a function of a 5% equity risk premium and a 2% risk free rate), which raises the odds of a disappointment relative to market expectations, and a commensurate multiple de-rate.
You can see the impact that the Philips Respironics’ recall had, and now, we’d suggest, the market is realising that it may have over-capitalised what is short run earnings benefit (as Respironics returns to market over the next year).
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