By Bruce Williams
Cochlear Ltd (COH) is a global leader in implantable hearing solutions, with products sold in around 180 countries.
It’s estimated that, of the 460 million people with a hearing disability, there are 15 million people with severe to profound hearing loss. In terms of market penetration, less than 5% of that 15 million have received treatment. This means Cochlear has the potential for strong growth for many years to come, providing that it can maintain its market-leading position.
To help achieve this, Cochlear maintains an annual R&D spend of approximately 13% of sales. In dollar terms, this equates to $195m, which far exceeds their competitors. Even though this reinvestment can impact margins and therefore profitability, we believe it is critical in improving patient outcomes and the company’s ongoing success.
Because current patients will require upgrades periodically, and the cost of switching to another product is high, Cochlear does have a stable and growing revenue stream.
COVID has disrupted elective surgery. Cochlear has also seen supply chain problems hamper production. However, they carry an extremely strong balance sheet, and have been able to navigate these challenges without long term implications.
In terms of valuation, Cochlear trades on an earnings multiple higher than we would usually consider prudent. However, there are a number of reasons why we remain comfortable, even given the expected rise in bond yields (that in today’s dollars decrease the value of future earnings).
- The company’s growth is not tied to economic conditions; that is, it is not a cyclical business
- It has the opportunity to grow both revenue and earnings over the long term
- It has a strong market position and the desire to reinvest to maintain and extend their advantage
- Margins are reasonably stable
- Their product provides benefits to both the patient and also society as a whole
If you would like more information please call 1300 ELSTON or contact us to speak to one of our advisers.