Welcome to the next edition of Stock showdown, where I use Morningstar equity research to compare the business and investment merits of different companies.

If you are an investor in individual shares, how might you weigh up different stock market opportunities? One approach you could take to this is comparing a company’s shares to your investment criteria.

In today’s Stock Showdown, we’re going to tap the insights of our healthcare analyst Shane Ponraj to compare two major ASX healthcare stocks on two important qualities that I want my investments to have.

Today’s contenders

You might have already guessed today’s contenders from my teaser. We’re going to be looking at CSL (ASX: CSL) and Resmed (ASX: RMD).

CSL’s main business is the sale of medical treatments derived from plasma, a component of human blood. They also have a large vaccines segment (which is now slated for a spin-off) and the iron deficiency and kidney treatment business Vifor.

Resmed, on the other hand, has emerged as the leading provider of sleep apnea treatment devices globally. Their CPAP machines keep people’s airways open while they are sleeping and prevent a loss of sleep quality from mini-suffocation episodes.

As you probably know, both companies are dual-listed on the ASX and in the US. CSL has an Australian dollar market cap of $107 billion and Resmed a market cap of $65 billion.

How we’ll compare the two companies

We are going to compare CSL and Resmed on two of my key investing criteria. These aren’t the only things I look at, but they are important given my strategy of trying to hold high quality assets for a long period of time.

Criteria 1: Long-term growth prospects

“Good long-term prospects” is rather vague, so let’s tighten it up a bit. I generally view this in two ways: the likelihood for demand to grow in the company’s industry and the company’s prospects of competing favourably for that demand.

By finding companies that seem to rate favourably on both counts, I hope to follow Warren Buffett’s simple (but not easy) recipe for investing successfully in individual shares:

“Your goal as an investor should simply be to purchase, at a rational price, a part interest in an easily-understandable business whose earnings are virtually certain to be materially higher five, ten and twenty years from now.”

Apart from what Marty Whitman called “asset conversion activities” (acquisitions, asset sales, et cetera), the main sources of equity return are changes in profits per share, returns of capital through dividends or buybacks, and changes in multiple.

While I generally do try to expose myself to improvements in valuation multiple by buying while markets are depressed about a company’s prospects, the main engine of return over the long-term is likely to be growth in profits on a per share basis.

A change in valuation multiple can be more of a one-time boost compared to a more sustainable tailwind from continued earnings growth. Let’s also not forget that dividends and/or buybacks are most likely to be funded by profits.

To be confident that a company can achieve my required annual return, then, I ideally want annual earnings growth potential in the high single digits. Especially if the share’s total return prospects aren’t supported by a decent starting yield.

How do Resmed and CSL’s growth prospects compare?

Given that Resmed’s market for sleep apnea treatment is still largely unpenetrated and that smart watches are increasing awareness of this condition, it didn’t surprise me that Shane’s revenue growth forecast for Resmed is higher than CSL’s.

Shane forecasts an average of 8% annual sales growth from Resmed over the next five years compared to 6% from CSL. As he expects more margin expansion at CSL, though, he expects similar annual EPS growth – 9% at CSL and 10% at RMD.

Despite this, I may actually prefer CSL from this angle. Resmed is essentially a one product company, which means you are highly dependent on the sleep apnea story - and Resmed’s leading position in the field - playing out as you hope.

CSL’s forecast growth is supported by several different end uses for its blood plasma treatments and the possibility of more uses being found yet. Buying CSL shares today (pre Seqirus spin-off) also gives you earnings from completely different business lines.

Competitive advantage/moat

Resmed’s competitive advantages are largely intangible. They relate to brand, patents, doctor relationships, and switching costs experienced by doctors that are trained to use Resmed’s products and monitor a patient’s progress using them.

By contrast, CSL’s moat is more tangible. In the core plasma products business, it stems mostly from the scale of its plasma collection network and processing assets. It would take a massive amount of money and time for a new entrant to replicate these.

As the fixed costs of processing plasma are very high, CSL’s scale gives it a massive cost advantage versus smaller firms. CSL and integrated peers Takeda and Grifols typically enjoy profit margins 20 percentage points higher than smaller firms.

Plasma products are the core of CSL but they are not everything. Its Seqirus business, which the company recently announced it will spin-off, delivered around 15% of the group’s operating profit in 2025. It is the world’s second biggest seller of flu vaccines.

Shane awards this segment of CSL’s business a Narrow Moat in isolation due to the scale and prowess of its research & development efforts, and the scale-based cost advantages it has in producing and selling vaccines in such volume.

Which moat is wider?

Both companies have been awarded a Narrow Moat rating by Shane. Which brings us to our first question for him. Why didn’t he assign either company with a Wide Moat rating, and what can we learn from that?

For CSL’s plasma business, it is the threat of disruption by gene therapies and recombinants. If successful, proposed treatments of this kind could remove the need for ongoing plasma treatment for some conditions. Shane isn’t too concerned though.

He thinks that gene therapy’s restriction to treating genetic disorders, their long and complicated routes to market and exorbitant prices, and CSL’s own investments in gene therapy candidates like Hemgenix reduce the threat. Similarly, newer recombinant technologies like argenx’s Vyvgart, are unable to treat immunodeficiencies, which make up the bulk of CSL’s plasma sales.

For Resmed, Shane’s hesitation in awarding a Wide Moat - Morningstar’s biggest hallmark of durable competitive advantage - comes back to its reliance on a single market and, for all intents and purposes, a single product.

This intensifies any potential disruption risks, though Shane is also fairly optimistic on Resmed’s ability to navigate these. The highest profile threat to CPAP machines, the current standard of care, are implants like those pioneered by Nyxoah.

Shane thinks this treatment’s reliance on surgical installation adds a barrier to adoption and Resmed owns minority stake in the company too. This, he says, could hedge some of the disruption risk.

Overall, if I had to bet on one of these two companies still enjoying a strong competitive position and returns on capital in twenty years, I would choose CSL.Even though Resmed is clearly in a strong competitive position in its field at the moment.

This is not because CSL’s moat sources are more tangible in nature than Resmed’s. In fact, you could argue that intangible moat sources are harder to replicate because they can’t be replicated with money alone.

What about valuation?

At the time of writing, both shares traded at discounts to Shane’s estimate of Fair Value but to very different degrees.

After a 30% rally in the past year, Resmed’s shares hovered just below Shane’s $45 per CDI value estimate. They currently have a three Star Rating, which factors in price relative to fair value and other factors like Moat and Uncertainty ratings.

CSL shares, on the other hand, traded more than 25% below Shane’s $305 Fair Value estimate and had a Star Rating of four. This after a vicious sell-off following its announcement of lay-offs and the Seqirus spin-off during fiscal 2026.

Based on what we’ve seen today, I would probably be more likely to add CSL to my portfolio than Resmed at recent prices. However, I do not currently have an investment in either share.

Thank you to our healthcare analyst Shane Ponraj, whose insights made this comparison of Resmed and CSL possible.

Further reading

Speaking of holdings in CSL, one person that does have one is my colleague Mark LaMonica. And as luck would have it, he has written about it in two recent Unconventional Wisdom columns.

You can see why Mark highlighted CSL as a controversial income pick here and see his latest thoughts on his investment in the company after a disappointing two years for its shares versus the ASX200.

You can also read Shane Ponraj’s initial reaction to the company’s fateful announcements in August here.

Previously on Stock Showdown:

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company’s future cash flows, resulting from our analysts’ independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.