ResMed Inc. (RMD)

Total return at 5 years: 7.6%/year = 6.3% appreciation + 1.3% dividend. The target price ($319) is ex-dividend; the $17 in dividends collected over 5 years are added separately.

By both methods, the value today (DCF $359 · Multiples $271) exceeds the market price ($235).

Today — fairly valued: at $235 trades ~13.4% below its value discounted to today (~$271); the discount is positive but does not reach the margin of safety we require (≥38%).

At 5 years — En valor: the target price ($319) plus dividends yield between the 4% floor and the 10% average return — a reasonable return, though without the margin of a great investment.

The bridge: the return at 5 years exceeds the risk-free rate (4.5%) — but the discount does not reach the required margin of safety (≥38%). To require a 15% annual return, it would need to be bought at ~$170.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($235) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The market discounts less growth (-1.6%/year) than we project (8.1%/year) → if the base case holds, there is margin: perception is more pessimistic than the estimated reality.

That growth implies ~$1.5 bn of owner earnings in year 5 (vs ~$2.4 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). The flow is returned almost in full (dividend + buyback) or redeployed into the operation, so that EV stays roughly flat and multiples compress because the metric grows, not because of cash accumulation. The valuation is done on EV/NOPAT. In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

Rolling grid: year 0 is the closed fiscal year 2026 (revenue US$5,653M at 30-Jun-2026, 10-K of 13-Aug-2026). The split between the two pieces is no longer an estimate: note 13 of this year's 10-K publishes segment net operating income for the first time, and gives Sleep and Breathing Health US$2,204.5M on US$4,977.6M of revenue and Residential Care Software US$217.7M on US$675.8M — that is 91.0% and 9.0% of segmented earnings, against 88.0% and 12.0% of revenue. The year-1 path does not come from the reported trajectory (9.8% to 10.9% year over year): the release of 6-Aug-2026 reports the fourth quarter at +9% reported and +8% in constant currency, and the rule requires starting from the FX-neutral rate, so organic growth starts at 8.5% and decays to 6.5% by year 5. There is no consolidated revenue or earnings per share guidance to anchor it —the company does not publish one in the release exhibit—, and that is declared rather than assumed. Two already-signed corporate events are applied on top of that organic base: the sale of MatrixCare for US$490M, with closing expected in the first quarter of fiscal 2027, which took US$220M of revenue and US$28M of operating income in the fiscal year (a 12.7% margin, well below the group's 33.4%, so the sale lifts the consolidated margin by some 84 basis points), and the purchase of Noctrix, which adds ~US$30M. Hence reported revenue falls to +5.8% in year 1 and returns to ~7% in year 2: it is the divestiture washing through, not a slowdown in the business, and that is why the shape is not a monotonic deceleration. The tax rate goes from 16.5% to 20.6%: the prior year's 16.5% was depressed by non-recurring benefits that management's own discussion names (a refund of interest and penalties from the tax authority and benefits from ceasing certain activities), so it was not a forward-looking rate. The OECD's Side-by-Side package exempts US-headquartered multinationals from the global minimum tax from fiscal years beginning 1-Jan-2026, but the company states that it is still assessing the impact and does not quantify it: it is left as optionality outside the base. Capex for the year jumped 74% to US$156M (2.8% of revenue) on the new Calabasas plant, which comes on line in fiscal 2027 replacing Chatsworth, and even so it stays below depreciation (US$201M), so it is all treated as maintenance. Buybacks are modeled with a share path at 1.3%/year, the net reduction the fiscal year itself revealed (147.1M to 145.2M of closing diluted shares): the company guides to returning more than US$1,850M in fiscal 2027 against the US$1,000M of the year just closed, but that exceeds free cash flow (US$1,650M) and leans partly on the proceeds of the sale, which is a one-off, so guidance is taken as corroboration and not as the number. The retained surplus is redeployed into the business keeping net cash stable.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (the metric grows while EV stays roughly flat). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $319 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $235, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $319 in 5 years plus $17 of dividends collected (the dividend adds to the return, not to the price) and a required return of 4.5% annually, the maximum to pay today is $271. Against the current market price ($235), the margin of safety is 13.4% (trades below the maximum → there is margin) and the total return at that price would be 7.6% annually.

• Multiple vs quality. EV/NOPAT ~22× for a business with exceptional ROIC and the core segment growing +10% year over year — reasonable for the quality, not demanding.
• Reverse-DCF. The price decline suggests the market is discounting a scenario closer to the adverse case than the base case.
• Margin of safety. Total return +8% vs the method's hurdle.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✓ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (107%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• ROIC exceeds the cost of capital. ROIC well above the 10% bar, on real invested capital from the balance sheet (equity + debt − cash).
• Margin and stability. GAAP operating margin 33.4% in FY2026 (32.7% in FY2025); the devices segment expanded from 41.0% to 44.3% over three fiscal years, while software stayed essentially flat (32.0%→32.2%).
• Cash quality. High cash conversion (FY2026 FCF US$1,649.5M, 108% of net income); capex US$156.3M (2.8% of revenue, +74% year over year for the new Calabasas plant); net cash position ~US$810M.

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

Sleep and Breathing Health's engine is volume × price: the company attributes growth to higher demand and units sold of devices and masks, without breaking out the price/mix component. Residential Care Software's engine is customer expansion in the HME and MEDIFOX DAN verticals, which decelerated in FY2026. The 10-K does not report units, cases or ARR separately.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• Real, not nominal. Devices growth +10% year over year in FY2026, consistent with FY2025 and FY2024; no FX or easy-comp breakdown in the sources available.
• Growth engine. Device demand and units sold in the devices segment + customer expansion in the software segment's HME/MEDIFOX DAN verticals; no volume-versus-price breakdown.
• Deceleration and cycle. The core segment maintains a stable trajectory (+10% in FY2024, FY2025 and FY2026); software did decelerate visibly (+10%→+5% reported / +4% at constant currency) — a real signal, though still distinct from the GLP-1 risk to the core business.

• Relevant in 10 years (recurrence). Sleep apnea is a chronic condition; CPAP therapy requires periodic device and mask replacement. High recurrence.
• Pricing power. The 10-K does not break out price/mix by segment; devices growth is attributed to higher demand and units sold.
• Moat and its direction. Wide, stable moat in devices (data, patents, regulation); much narrower in software. The devices margin improvement is operating leverage on volume, not evidence of a widening moat.
• Capital cycle. The undiagnosed apnea market remains largely untapped (more than 900 million adults); the risk is not competition but a structural demand shift (GLP-1).

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• ✓Leverage (net debt / EBITDA)Net cash $0.8 bn
• –Interest coverage (EBIT / interest)no data
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 107% of ROIC
• ✓Value creation (ROIC − 10% bar)+16pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.8x — no over-investment
• ✓Float / working capitalFrees up cash $0.1 bn (float / negative WC)
• ✓Dilution (SBC % of revenue + shares)SBC 1.8% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. Net cash ~US$810M; total debt US$659M vs cash US$1,469M, plus US$1,500M undrawn on the revolving credit facility.
• Coverage and cash. Positive net non-operating income; US$411.1M of the US$661.1M in debt obligations mature in FY2027, covered by the undrawn revolving credit facility.
• Litigation and compliance. VirtuOx corporate integrity agreement (US$3M) in effect until 2027 for improper billing 2016-2020; Noctrix is directly subject to the Stark Law; ongoing patent litigation (Cleveland Medical Devices, Fractus) with no estimable loss; Astral field safety notice (US$41.9M in FY2026).

• Skin in the game. Insider holdings detail pending from the DEF 14A proxy, outside the scope of this 10-K re-read.
• Capital allocation. Buybacks and a growing dividend, reinvestment in R&D and complementary M&A (VirtuOx, Noctrix) funded in part by the agreed MatrixCare sale (US$490M). No signs of value-destructive M&A.
• Integrity / normalization. The company transparently disclosed the VirtuOx corporate integrity agreement (US$3M, in effect until 2027) and the Astral ventilator field safety notice (US$41.9M in FY2026) in its own financial statements.

• The market is over-discounting substitution of therapy by GLP-1 drugs: the structural narrative weighs more than the current data, with the core segment growing +10% year over year in FY2026 and operating margin expanding from 41.0% to 44.3% over three fiscal years.
• The stock's decline is consistent with a discount for perceived future risk more than any observed deterioration in the core business.
• The agreed sale of MatrixCare (expected close 1Q FY2027) and the recent Noctrix acquisition create transitory uncertainty around software and new regulatory exposure — noise that does not touch the core devices business.

The core business shows no signs of deterioration (devices growth and margin improving, positive net cash); the gap between market perception (structural GLP-1 fear) and the reality of the fiscal 2026 numbers is the source of the opportunity. Software did decelerate (+10%→+5%/+4%), a real data point that is declared rather than downplayed.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at +1%/year (+5% total): the margin of safety protects the downside. The bull (+13%/year, +82% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• GLP-1 substitution. The structural disconfirmer: obesity drugs could reduce CPAP therapy demand if weight loss is sustained.
• Medicare/Medicaid reimbursement. The 'One Big Beautiful Bill Act' cuts ~US$1.1 trillion in federal Medicaid/ACA spending between 2025-2034 per the CBO, with ~10 million additional people without coverage by 2034.
• Regulatory compliance (VirtuOx / Noctrix). New direct exposure to the Stark Law, the Anti-Kickback Statute and the False Claims Act as a direct Medicare biller — a stricter regime than the 'business associate' status under HIPAA that applied before.
• Supply chain. Manufacturing almost entirely outside the U.S., exposed to tariffs and Chinese controls on rare-earth magnets.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  A wide moat and ROIC 26% above the 10% bar, but the margin is limited (+13%) → excellent business at a fair price.

• Peter Lynch Growth at a reasonable price (GARP)

  A fast grower growing 8% at a multiple/growth of 2.7 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 6% (EBIT/EV) + ROIC 26% → brushes the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts -2% vs our 8%: perception is more pessimistic than reality, with an identified source of the discount.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -1%/yr, bull-scenario ceiling +12%/yr over 5y → capital protected, asymmetry in your favor.

• Pat Dorsey Moat strength (Five Rules)

  A wide moat, stable; sources: intangibles, efficient scale, cost advantage, switching costs → passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  Justifying the price requires discounting -2%, within what we project (8%) — the story squares with the numbers.