ResMed Inc. (RMD Quick QuoteRMD - Free Report) has been gaining from the robust performance in the Software-as-a-Service ("SaaS") business. The ongoing rebound in device sales within the company’s Sleep and Respiratory Care segment instills optimism. The robust performance across high-growth markets is an added advantage. However, mounting expenses and stiff competition raise apprehension.

Over the past year, the Zacks Rank #3 (Hold) stock has gained 38% against an 17.4% fall of the industry. Notably, the S&P 500 has risen 9% in the same period.

The renowned medical device company has a market capitalization of $37.34 billion. Its earnings surpassed estimates in the trailing three quarters and met the same once, with an average surprise of 6.6%.

Over the past five years, the company’s earnings grew 14.5%, way ahead of the industry’s 9.1% rise and the S&P 500’s 2.8% increase. The company’s long-term expected growth rate of 16.3% for earnings compares with the industry’s long-term growth expectation of 16.9% and the S&P 500’s 11.4% rise.

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Let’s delve deeper.

Factors At Play

SaaS Business Grows: ResMed is a major strategic provider of SaaS solutions for out-of-hospital care. The SaaS business registered revenue growth of 7.8% in the second quarter of fiscal 2022, driven by high-single-digit growth across home medical equipment as well as facility-based and home-based care settings on a year-over-year basis.

We are also encouraged by global revenues from the SaaS business, which increased 8% year over year at a constant exchange rate (CER). ResMed expects SaaS revenues to achieve high-single-digit growth by the end of fiscal 2022.

International Focus to Drive Growth: ResMed continues to invest and expand its presence in high-growth markets like China, South Korea, India, Brazil and several countries in Eastern Europe. In the fiscal second quarter, global revenues improved 13% at CER, while revenues from the United States, Canada and Latin America improved 13% from the prior-year period.

In fiscal 2021, Germany approved the reimbursement for mandibular repositioning device, including RedMed’s digital 3D printed dental sleep apnea product called Narval.

Device Sales Rebound: ResMed recorded a 19% year-over-year increase in device sales in the United States, Canada and Latin America in the fiscal second quarter.

In the combined Europe, Asia and other markets, the rise in device sales was 13% at CER, reflecting the benefits of incremental revenues due to a competitor's recall. Device sales increased 16% at CER on a global basis, raising optimism.

Downsides

Escalating Expenses Hamper Margin: ResMed’s selling, general and administrative expenses climbed 9.4%, while research and development expenses increased 13.8% in the fiscal second quarter. These escalating expenses resulted in a 189-basis-point contraction in the adjusted operating margin, thereby building significant pressure on the bottom line.

Macroeconomic Scenario Poses Challenges: The overall macro-economic uncertainty across the globe affects physician office visits, impacting ResMed's progress. The company has been facing component supply issues, and challenges pertaining to the sea and air freight, which are hampering its ability to meet the product demand.

Competition Threatens Growth: The market for sleep-disordered breathing products is highly competitive with respect to product price, features and reliability. ResMed’s primary competitors include renowned MedTech bigwigs and regional manufacturers in this space. The disparity between the company's resources and those of its competitors may increase due to the consolidation in the healthcare industry.

Estimate Trend

Over the past 60 days, the Zacks Consensus Estimate for ResMed’s fiscal 2022 earnings has moved down 2.4% to $6.11.

The Zacks Consensus Estimate for the company’s fiscal 2022 revenues is pegged at $3.73 billion, suggesting a 16.7% rise from the 2020 reported figure.

Key Picks

A few better-ranked stocks in the broader medical space are Henry Schein, Inc. (HSIC Quick QuoteHSIC - Free Report) , McKesson Corporation (MCK Quick QuoteMCK - Free Report) and AmerisourceBergen Corporation .

Henry Schein has an estimated long-term growth rate of 11.8%. Henry Schein’s earnings surpassed estimates in the trailing four quarters, the average surprise being 25.5%. It currently carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Henry Schein has outperformed the industry over the past year. HSIC has gained 27.4% compared with the industry’s 7.5% rise over the past year.

McKesson has a long-term earnings growth rate of 11.8%. McKesson’s earnings surpassed estimates in the trailing four quarters, delivering a surprise of 20.6%, on average. It presently carries a Zacks Rank #2.

McKesson has outperformed the industry over the past year. MCK has gained 55% against 7.6% industry growth in the said period.

AmerisourceBergen has a long-term earnings growth rate of 8.2%. In the trailing four quarters, the company’s earnings surpassed estimates thrice and missed once, delivering an average surprise of 2.3%. The company currently has a Zacks Rank #2.

AmerisourceBergen has outperformed its industry in the past year. It has gained 30.2% versus the industry’s 7.5% rise.