Has the selling in growth stocks created value in Cochlear (COH)?
Stock
Cochlear (COH) $192.54 as at 9/10/2018
Event
With the selloff in the markets two most loved healthcare stocks continuing, we thought it was time to ask the same question to COH as we did for CSL just a few weeks ago. Since our “How far can CSL fall” report 3 weeks ago, CSL has fallen another 5.6% to $190.90 today, taking the total decline to just shy of 18% since early September. Similarly, Cochlear has fallen over 13% since the September 4 high of $221.80 to currently trade $192.64, down -4.8% today.
Cochlear is a hearing implant manufacturer and distributor whose product is near enough unrivalled in quality and market share. The drivers for COH are similar to CSL, global population growth, as well as the rise in the Asian middle class has seen demand for healthcare grow at consistently high levels for the past decade. This trend is set to continue, opening up more markets for these two big healthcare companies to move into.
Cochlear is trading on a solid 40.8x estimated PE which skyrocketed to 44.9x at the all-time high share price, and is about 10% above the 2 year average of 35.8x. The market is certainly asking a lot from Cochlear, and analysts are expecting earnings growth of 12.6% through FY19, and above 10% each year through to 2022. This is a bigger PE while growing earnings at around the same rate as CSL.
The obvious question, is this premium to CSL now justified? Put simply, yes it is. Cochlear’s product has a much more foreseeable demand, lowering the risk to earnings growth. It also has a much higher barrier to entry which reduces the ability for competitors to encroach on market share, although Bose has today announced they have developed a hearing aid as well, it will be a lower quality for those with low to moderate hearing loss (Cochelar's main market is moderate to high loss). COH also has a significantly lower debt level of 0.2x EBITDA, while CSL is 1.2x. Still, 40x estimated PE is enough to make any growth manager think twice. On the 2 year average PE, COH would be trading around $170.
Cochlear (COH) Chart
Market Matters Take/Outlook
We like Cochlear at current levels following the aggressive sell off in the growth end of town. We will likely be active in COH in the coming days.
