Australia lacks global brands. There is no Australian McDonald's, no P&G or Toyota. But there is a specialised global niche in which Australia punches well above its weight: global healthcare.
Alongside CSL, Cochlear and Sonic Healthcare sit two of the world's leading sleep-apnoea machine manufacturers - Fisher & Paykel Healthcare and ResMed.
Both are highly profitable, resilient, growing businesses and exactly the type of blue-chip stocks you should aim to own.
In the past five years, ResMed has grown annual earnings per share by 22 per cent, while F&P Healthcare has managed a respectable 9 per cent.
ResMed has delivered 70 straight quarters of revenue growth. There's a reason for that: less than a quarter of sleep apnoea sufferers receive treatment, which is a nice starting point for an investment case.
Obstructive sleep apnoea (OSA) is a collapse of the throat during sleep. Linked to strokes, hypertension and heart attacks, it affects an estimated 20 per cent of the global population. In a recent study by Harvard and McKinsey, the costs associated with the condition are more than $50 billion a year. This is no small problem.
There are three primary ways to treat OSA; surgery, mandibular splints and continuous positive airway pressure (CPAP) machines. It's in the latter area that F&P Healthcare and ResMed have carved out very lucrative businesses.
Profitable market
CPAP machines deliver constant air pressure through a facial mask, keeping the throat open during sleep. The concept is simple enough but the complexity of the technology shows up in the price and margins made on it.
Pumps cost from $1500 to $2500 and rarely need replacing. The masks and tubes cost between $100 and $400, and need replacing a few times a year. That makes for a satisfying business model: a fat sale upfront and high margin ancillary sales for as long as the patient lives.
ResMed's market capitalisation of almost $6 billion is more than five times that of F&P Healthcare's, a disparity mirrored in their respective revenue, profits and market share. Size is an advantage.
ResMed's gross margin - the difference between what it pays to produce its products and what it sells them for - is greater, too, because it can charge a premium for industry-leading products, the fruit of a $US92 million annual R&D budget.
ResMed's ultimate customers - typically, individual patients - aren't especially price-sensitive, either. Many receive reimbursement for their machines from a health insurer, while features such as heated air, comfortable masks and silent operation, rather than price, drive purchase decisions.
Price insensitivity and high margins are a lovely combination but are meaningless if they don't deliver higher returns on capital.
On this measure, F&P Healthcare produced an impressive average return on equity (ROE) of 27.2 per cent during the past five years, while ResMed achieved a respectable 14.5 per cent. The disparity, though, is misleading.
To compensate for its smaller size and to accelerate growth, F&P Healthcare uses debt to boost ROE. It sports a net debt-to-equity ratio of 31 per cent, while ResMed boasts a net cash balance of $US558 million.
That makes it a lower-risk business. If either company had to fund a product recall - as Cochlear did last year - ResMed would be better placed.
So why doesn't ResMed use its position to squeeze F&P? And if this is such a profitable industry, why isn't there new competition?
Growth market
The first question is easily answered. In a growing market, why worry about crushing your rivals when there's easy money in new clients?
The second relates to industry structure. Making a new CPAP machine is one thing; having the distribution network to sell it is another. ResMed and F&P have built decades-long relationships with sleep specialists that a newcomer would struggle to break.
Given that both business are extremely profitable and have massive growth potential, F&P Healthcare's PER of 18 isn't a surprise. ResMed, a stronger, bigger business on a PER of 23 and measly dividend yield of less than 1 per cent, is even more expensive.
F&P boasts a 5 per cent dividend yield but the dividend will be kept flat until profits increase substantially as it pays out most of its profits as dividends and wants to reduce gearing levels.
If the Australian dollar fell substantially, these PERs would drop but, right now, F&P Healthcare is more attractive, although suitable only for investors prepared to buy businesses that aren't dominant.
If you'd rather wait for a cheaper price, a view Intelligent Investor favours, consider opening a 1 per cent to 2 per cent position now and increasing it if and when prices fall.
Nathan Bell is the research director at Intelligent Investor, intelligentinvestor.com.au. This article contains general investment advice only (under AFSL 282288).
