ResMed Inc (ASX: RMD) shares and TPG Telecom Ltd (ASX: TPM) shares are two ASX blue-chips that have seen steep drops recently, but they might be on the way back up. Which one would I buy?
ResMed Inc
Dr Peter Farrell founded ResMed in 1989 to develop and manufacture medical devices to help people with sleep apnoea, chronic obstructive pulmonary disease (COPD) and other chronic diseases. ResMed is based in the US, with a dual-listing on the ASX and NYSE.
The ResMed share price tumbled from $16.56 on January 23rd 2019 to just $12.89 on January 30th, 2019. The catalyst for the decrease was their Q2FY19 results.
The report showed single-digit growth; revenue up 9% and net operating profit up 8%. The low growth did not justify the share price, so the shares dropped.
The exciting aspect of ResMed, to me, is the growth in software sales and capabilities. In Q2FY19, Software as a Service revenue increased by 63%.
Through 2018, ResMed acquired MatrixCare, a leader in software solutions for more than 15,000 providers across US health sectors. They also acquired Propeller Health, a digital therapeutics company providing connected health solutions for people living with COPD.
These acquisitions give ResMed another source of revenue and allow them to move into the software space, while still providing the ‘hardware’, or medical devices. It could be a real growth sector for ResMed over the coming years.
TPG Telecom
TPG is one of Australia’s largest broadband and mobile phone providers, with around 2 million broadband subscribers.
TPG’s share price dropped almost 20% over the course of a few days back in December 2018. Most of the decline was due to concerns over their proposed merger with Vodafone; we’ll get to that in a moment.
Most of TPG’s revenue (about 80%) comes from broadband services, with only about 6.5% coming from mobile services. While this has benefitted TPG in terms of the NBN rollout and customer satisfaction ratings, it rasies questions about how much money they could be making if they had a larger presence in mobile services.
That’s why TPG has proposed a merger with Vodafone, and this is where I think the potential upside is for TPG. If the merger goes ahead, TPG will be able to challenge Telstra Corporation Ltd (ASX: TLS) for mobile contracts and start to grow their mobile services revenue.
The ACCC is currently investigating the merger details and will release a report in May this year determining whether the merger can go ahead.
I recently wrote an article comparing Telstra to TPG which discusses both companies in more depth, as well as the merger.
Summary
While I probably wouldn’t buy either of these companies right now, they both have attractive upside potential in the coming years. For ResMed, the question is whether they can build their software services to provide a significant slice of the revenue (and growth). For TPG, the question is whether the ACCC will approve the merger.
If I had to pick one to watch, it’d be TPG for the merger update. If you’re looking for shares that could deliver life-long growth and dividends, get our free report below…
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Disclaimer: At the time of writing, Max does not own shares in any of the companies mentioned.
