We covered the Cochlear dramatic downgrade in detail yesterday Here. As we said at the time, COH was whacked after delivering one of the ugliest downgrades in a long time, especially when it was only two months ago that they said earnings would likely be at the lower end of guidance, not 30% below! – credibility straight out of the window.
- We believe it’s going to take time for Cochlear management to regain the market’s confidence after this debacle.
Cochlear are claiming the key driver of the downgrade is weakening consumer sentiment, particularly in the US, where confidence has fallen to historic lows. Cochlear flagged this as directly impacting discretionary healthcare decisions, especially among adults and seniors, its core customer base.
Elective healthcare spend, particularly higher-cost procedures, is proving more sensitive to consumer confidence than previously assumed. However, US retail stocks tested all-time highs last night.
- We see no reason to buy Cochlear at this stage, it’s cheap for a reason.
It’s important to remember that this wasn’t a one-off shock; Cochlear’s weakness has been a gradual de-rating driven by a mix of operational and macro pressures, and as we often say, surprises usually unfold with the trend.
Slower-than-expected growth: While the long-term story is intact, growth has been inconsistent. Procedure volumes (implant surgeries) have taken time to recover post-COVID, particularly in key markets.
Margin pressure: Costs have been rising, including manufacturing, logistics and investment in R&D — limiting operating leverage even as revenue recovered.
Exposure to discretionary healthcare: Cochlear implants are often elective procedures, particularly for adults. As cost-of-living pressures and higher interest rates hit households, patients have delayed or deferred surgery — especially in the US.
High expectations / premium valuation: Cochlear has historically traded on a premium multiple as a “quality growth” name. When growth disappointed, the market de-rated the stock accordingly.
Cochlear has rerated so far that it is now forecast to yield 4.4% part-franked, not what is normally expected/delivered by a high-growth healthcare business – perhaps part of this will go towards a buyback in August. Cochlear remains a high-quality business supported by strong long-term tailwinds—ageing populations, low market penetration and leading technology—but in the near term, the headwinds are causing havoc with the share price.
- We see no reason to catch this falling knife until further notice – remember the CSL share price has already been in decline for 12-months longer than Cochlear.
MM is neutral towards COH around $100
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