Cochlear Limited (COH)

By Jason Fittler

COH is the global leader in implantable hearing devices.

It commands a 65% market share, employing more than 2700 people in 25 countries.

The attraction of this franchise is its long-standing reputation for quality and reliability, making its products the first choice for many surgeons worldwide.

The company did suffer a blemish in 2011 when they voluntarily recalled one of their flagship products, but this does not seem to have had a lasting impact on market share, and arguably demonstrates the regard in which surgeons hold the company.

The company has just released their latest product – Nucleas 6 – which management have called a game-changer.

It is the smallest sound processor on the market and boasts a number of new features including its ability to be operated as both a hearing aid and cochlear implant system, in addition to containing a processing program that can be optimised to the external environment.

FY14 should be viewed as a transitional year for the company, since if history is any guide, sales growth can be sluggish leading up to and immediately following the release of a new product as clinics destock and potential recipients take time to assess the new product and upgrade.

Looking forward, earnings growth will be underpinned by the company’s continued foray into undeveloped markets such as China, Eastern Europe and South America.

The bears point to the possibility of market share erosion given aggressive competition from rival, Advanced Bionics.

While we expect Cochlear to lose some market share to rivals going forward, we nevertheless believe they will retain a stranglehold on the market given their technological superiority.

According to our numbers for 2014, COH is trading on prospective 22-times earnings and paying a gross yield of 5.5% at current levels.

While we feel the company deserves to trade at a premium to the rest of the market given its defensive attributes as well as its superb track record of creating wealth for shareholders, we will be looking to accumulate the stock on potential weakness.

For more information on Cochlear Limited (COH) please contact us on 07 4771 4577.