What you should always be looking for in a stock is long-term drivers – economic, demographic, or technological – that should work in the company’s favour. Over the next few articles, I’m going to look at a group of stocks that fit this bill. Here’s the first two.
- ResMed Inc (RMD, $28.65)
Market capitalisation: $47.5 billion
12-month total return: –10.9%
3-year total return: 4.3% a year
FY25 estimated yield: 1.1%, unfranked
FY25 estimated price/earnings (P/E) ratio: 21.9 times earnings
Analysts’ consensus target price: $32.98 (Stock Doctor/Refinitiv, 12 analysts)
Sleep-breathing device maker ResMed is one of Australia’s true global leaders, with its core business in devices that help people suffering from obstructive sleep apnoea (OSA), chronic obstructive pulmonary disease (COPD) and other respiratory conditions to sleep better. ResMed’s crucial advantage is its continuous positive airway pressure (CPAP) machines and masks, which give it a strong market position, being considered the industry standard for moderate to severe cases of OSA.
The company’s newer-generation devices – such as its latest CPAP device, the AirSense 11, launched in 2023 – enable doctors to remotely monitor patients’ usage and breathing performance, using the cloud, and lift patients’ adherence rates significantly. ResMed also plays a major role in generating clinical data, from usage of its products, that demonstrates how treatment can minimize risks related to OSA, such as hypertension, stroke, heart attack, and Alzheimer’s disease.
ResMed’s market position gives it pricing power and negotiating with suppliers – but sleep breathing disorders is a competitive business, with three big global rivals always snapping at ResMed’s heels, with similar products.
ResMed sells its products in more than 140 countries to sleep clinics, home healthcare dealers, patients and third-party ‘payors,’ which means health insurance schemes, both public and private, which reimburse its products. In the year ended 30 June 2023, sales in the US accounted for 64% of revenue, and it was 63% in the previous year.
ResMed has the tailwind behind it that it has a large global market, but one that is growing – the OSA market is mostly undiagnosed. According to the company, there are 936 million people globally with sleep apnoea and 424 million of these suffer from severe sleep apnoea. But the company believes its main markets are “globally under-penetrated,” and famous British journal The Lancet Respiratory Medicine appears to agree: it estimates that one billion people between the ages of 30 and 69 are affected by OSA, stating that the condition is both “under-recognised and under-diagnosed.”
The other, more short-term, tailwind is that ResMed’s main competitor – Philips Respironics – has been struggling with a product recall since 2021 and is still not permitted by the US Food and Drug Administration (FDA) to sell new sleep apnoea devices in. the US. This has helped ResMed’s US market share rise from about 55% to more than 80%, particularly as the AirSense 11 hits the market.
These circumstances have helped investors overlook a recent scare occasioned by the introduction of GLP-1 “weight management” drugs (branded as Ozempic, Wegovy and Mounjaro), which, given that obesity is a big risk factor for OSA, introduced the idea that people reducing their weight significantly from taking these drugs could result in reduced demand for CPAP therapy. However, the shine has come off this idea, with articles appearing talking about the health impact of long-term use of such drugs. On balance, I think ResMed has a great market position, and the tailwinds outweigh the potential for a headwind from this source.
- Propel Funeral Partners (PFP, $5.42)
Market capitalisation: $725 million
12-month total return: 24.8%
3-year total return: 24.9% a year
FY25 estimated yield: 2.9%, fully franked (grossed-up, 4.1%)
FY25 estimated price/earnings (P/E) ratio: 27.1 times earnings
Analysts’ consensus target price: $6.10 (Stock Doctor/Refinitiv, seven analysts)
Propel Funeral Partners benefits from a tail-breeze, in that people are always dying – and it is the second-largest funeral provider in the business, and the largest listed player since InvoCare disappeared from the ASX in November 2023 after being taken over by private equity group TPG.
Propel owns funeral homes, cemeteries, crematoriums and related assets in Queensland, New South Wales, Victoria, Tasmania, South Australia, Western Australia, the ACT and New Zealand. It provides a broad range of services and products across the “death care” industry. At the December 2023 half-year, Propel had 187 operating locations, 113 of which were owned, and 74 leased: the breakdown was 141 funeral homes, 37 cremation facilities and nine cemeteries. 49 of its operations are in New Zealand.
Propel operates a broad range of franchises, with White Lady Funerals and Simplicity Funerals some of the best-known.
Not surprisingly, the main driver of revenue in the death care industry is the number of deaths; and that is steadily increasing with a growing and ageing population, in both Australia and New Zealand. That is the steady tailwind behind Propel Funeral Partners. Demand for funeral services is not correlated to the economic cycle, interest rates or inflation – it is simply part of life.
Death numbers in Australia grew by 0.9% a year between 1990 and 2019, with a very similar trend in New Zealand, where deaths increased by 0.8% a year between 1990 and 2019. In Australia, death volumes are expected to increase by 2.5% a year from 2023 to 2030, and then by 2.9% from 2030 to 2040; in New Zealand, death volumes are expected to increase by 1.9% a year from 2024 to 2030, and then by 2.1% from 2030 to 2040.
Where InvoCare is the biggest funeral provider, with 21% of the market to Propel’s 9%, the 70% remainder shows what a fragmented market funerals is in Australia – there is plenty of room for Propel to grow. Propel has spent $284 million on acquisitions since its IPO in 2017 and says it has committed about $92 million to acquisitions so far in financial-year 2023-24.
The increasing number of funerals that Propel handles – from 278 in FY12 to 18,029 in FY23 – has seen revenue and earnings grow steadily. Just in the first half of the current financial year (FY24), funeral volumes grew by 17.4%, to 10,637; Propel’s revenue rose by 22.8%, to $102.9 million; and net profit increased by 6.7%, to $11.7 million. The company’s average revenue per funeral has grown at a compound annual growth rate of more than 3% since 2014.
Propel has consistently paid a gross dividend yield that beats the market. It has been a very strong investment performer, with low earnings volatility, and analysts see it continuing to be just that, as it continues to grow in a fragmented market.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.