COH - Cochlear Limited

[Gringotts Bank]

Anyone catch Kohler's interview with Dr Chris Roberts, the Cochlear CEO, on Inside Business yesterday? I was out so I've only seen a news report this morning, but it suggests that Cochlear is looking to grow its footprint in China and other emerging markets?

Yeh I saw it. I'd never seen Roberts before but he came across as a bit old fashioned, or a bit off the pace.

Still a great co. and I'd like to trade it if it gets to [edit]... yes a good opportunity for a bounce.

 

[McLovin]

Anyone catch Kohler's interview with Dr Chris Roberts, the Cochlear CEO, on Inside Business yesterday? I was out so I've only seen a news report this morning, but it suggests that Cochlear is looking to grow its footprint in China and other emerging markets?

There wasn't too much new in that interview. It is still a great company but not at any price.

 

[clinta44]

I'd never seen Roberts before but he came across as a bit old fashioned, or a bit off the pace.

My thoughts on the man. I think he just happened to land the CEO job at a great company, and he's not a great CEO. He presided over the company during the recall debacle and still collects massive bonuses!

I still cant fathom why he is keeping Manufacturing in Australia, It's a massive disadvantage! Its a massive cost disadvantage, but even worse because a lot of the products are manufactured here a lot of countries won't register the product until it has been registered here first, and Australian approvals are slow as a wet week!

 

[Nawill]

Can anyone explain why COH dived in early Feb?

 

[skc]

Can anyone explain why COH dived in early Feb?

They reported profits that were below market expectation.

If you simply scroll back a few posts you will see some commentary from various posters around that time.

 

[robusta]

On top of Advanced Bionics getting their act together it looks like the Chinese are now making implants for half the price.

http://www.businessweek.com/articles/2013-03-28/a-chinese-hearing-implant-takes-aim-at-cochlear

When you are the market leader in a growing market with nice fat margins other businesses will want a piece of that action.

Big surprise it looks like the analysts still can't reach a consensus.

http://zolmax.com/cochlear-given-outperform-rating-at-sanford-c-bernstein-coh/52442/

 

[robusta]

On top of Advanced Bionics getting their act together it looks like the Chinese are now making implants for half the price.

http://www.businessweek.com/articles/2013-03-28/a-chinese-hearing-implant-takes-aim-at-cochlear

When you are the market leader in a growing market with nice fat margins other businesses will want a piece of that action.

Big surprise it looks like the analysts still can't reach a consensus.

http://zolmax.com/cochlear-given-outperform-rating-at-sanford-c-bernstein-coh/52442/

Share price down almost 3% today, the future should be interesting for Cochlear.

 

[chops_a_must]

Share price down almost 3% today, the future should be interesting for Cochlear.

It's heading to 45 IMO. Looks to be in a corrective wave c after completing five waves and a wave a and b.

CSL also looks like it could be entering a prolonged down turn after completing a long term wave 5.

 

[robusta]

It's heading to 45 IMO. Looks to be in a corrective wave c after completing five waves and a wave a and b.

CSL also looks like it could be entering a prolonged down turn after completing a long term wave 5.

Thank you chops_a_must, having no understanding of technical analysis myself it is good to get your view. Here is another view from The Motley Fool's Mike King.

http://www.fool.com.au/2013/04/02/is-now-the-time-to-buy-cochlear/

As I have posted in this thread I would become interested again if the sp heads towards $55.00 but until then it is a hold and watch from me.

 

[McLovin]

I don't see the COH share price weakness as being the result of a few cheap knock-offs out of Asia. The implied growth in the SP doesn't match the reality of the business and that's why the price is coming off.

 

[robusta]

I don't see the COH share price weakness as being the result of a few cheap knock-offs out of Asia. The implied growth in the SP doesn't match the reality of the business and that's why the price is coming off.

You could be right McLovin probably the hardest thing to predict is future growth, how much it will compound and for how long. Given Cochlear's history of growth they deserve a place in my portfolio. Maybe just maybe the growth will continue.

 

[McLovin]

You could be right McLovin probably the hardest thing to predict is future growth, how much it will compound and for how long. Given Cochlear's history of growth they deserve a place in my portfolio. Maybe just maybe the growth will continue.

AB claims 10-15% industry growth. Given COH's size, it's hard to see them growing above industry. So then the question is are they worth 23x earnings?

 

[McCoy Pauley]

My opinion, and it is only my opinion, is that investors/speculators are frustrated on the company's silence over the reintroduction of the recalled implant model or its replacement. COH has never given guidance and therefore analysts tend to grasp at straws when trying to predict COH's future.

The introduction of cut-price implants in markets yet untapped by COH is of some concern, but if the manufacturers cut corners on the development of the implants which leads to an eventual recall, COH is in prime position to take up the market share in those countries.

Further, given the size of the populations of China and India, COH may not necessarily need such a high proportion of the market in order to make a satisfactory rate of return on its investments in those countries.

 

[robusta]

AB claims 10-15% industry growth. Given COH's size, it's hard to see them growing above industry. So then the question is are they worth 23x earnings?

Just looking at the dividends if they can increase by 10% a year for the next ten years they will be paying around $6.35 annually if they can stretch it to 15% you are looking at around $9.50. Ten years is a long time but the chance for this sort of growth is worth holding a business of this quality in my opinion.

 

[Klogg]

Just looking at the dividends if they can increase by 10% a year for the next ten years they will be paying around $6.35 annually if they can stretch it to 15% you are looking at around $9.50. Ten years is a long time but the chance for this sort of growth is worth holding a business of this quality in my opinion.

Growing profits by 10% for ten years in a row is a huge ask....

And if you assume the same 10% profit growth (from last years' earnings of $2.77/share and current price of $66) you're looking at:

Earnings	P/E	Year
2.77	23.83	0
3.05	21.66	1
3.35	19.69	2
3.69	17.90	3
4.06	16.27	4
4.46	14.79	5

I know it's an overly simplistic view, but it hardly seems like you're getting value for money at the current share price. Assuming things go perfectly (~10% growth) you've still got a stock trading at almost 20*P/E two years on! (on today's SP)

And as for the 10% growth, I share McLovin's views on size and growth rates...

 

[McLovin]

Just looking at the dividends if they can increase by 10% a year for the next ten years they will be paying around $6.35 annually if they can stretch it to 15% you are looking at around $9.50. Ten years is a long time but the chance for this sort of growth is worth holding a business of this quality in my opinion.

That might turn out to be the case but it assumes that the market that has existed for the last 10 years continues for the next 10. With increased competition, even if they can maintain 10% growth at the top line it may not translate to 10% growth at the bottom line, and is unlikely to flow through to 10% dividend growth. And even if they can achieve that, what's the value of a $6.35 dividend in 2023 in today's money? If dividends are your strategy then just buy TLS today which is pretty close grossed up yield wise to what COH will be in 10 years time. A bird in the hand etc.

 

[robusta]

Growing profits by 10% for ten years in a row is a huge ask....

And if you assume the same 10% profit growth (from last years' earnings of $2.77/share and current price of $66) you're looking at:

Earnings	P/E	Year
2.77	23.83	0
3.05	21.66	1
3.35	19.69	2
3.69	17.90	3
4.06	16.27	4
4.46	14.79	5

I know it's an overly simplistic view, but it hardly seems like you're getting value for money at the current share price. Assuming things go perfectly (~10% growth) you've still got a stock trading at almost 20*P/E two years on! (on today's SP)

And as for the 10% growth, I share McLovin's views on size and growth rates...

10% growth per year is a big ask I agree , I also agree the price at the moment is a bit rich. Cochlear on average over the last ten years has only grown EPS by around 10.7% and dividends by 13.7% but this is compounded annually so EPS has gone from $1.09 to $2.77 and dividends have gone from $0.77 to $2.45

If we compound $2.77 out for ten years we get a EPS of around $7.18

The EPS in 2011 was $3.08 with the recent dip due to the recall but messing with the starting number is just as dangerous as anchoring on the 10% compounding rate.

A logical solution would probably be to work out a price you are prepared to pay where a lower C.A.G.R say around 6-7 % would still give you a decent return. There are not that many ASX listed businesses with a chance of sustained above GDP growth over a long period of time. Cochlear may be one of them.

 

[robusta]

That might turn out to be the case but it assumes that the market that has existed for the last 10 years continues for the next 10. With increased competition, even if they can maintain 10% growth at the top line it may not translate to 10% growth at the bottom line, and is unlikely to flow through to 10% dividend growth. And even if they can achieve that, what's the value of a $6.35 dividend in 2023 in today's money? If dividends are your strategy then just buy TLS today which is pretty close grossed up yield wise to what COH will be in 10 years time. A bird in the hand etc.

It is a risky strategy paying high multiples of earnings for future growth. You are right plenty can go wrong. On the few occasions it works out the compounding can work miracles for your returns. Paying a bit over $45.00 just over a year ago I am happy to hold and watch Cochlear for a while yet to see if they can achieve some decent growth. If the growth continues who knows what multiples people would be prepared to pay of those future earnings?

 

[chops_a_must]

Thank you chops_a_must, having no understanding of technical analysis myself it is good to get your view. Here is another view from The Motley Fool's Mike King.

http://www.fool.com.au/2013/04/02/is-now-the-time-to-buy-cochlear/

As I have posted in this thread I would become interested again if the sp heads towards $55.00 but until then it is a hold and watch from me.

It really is in the sweet spot for a short.

It's got a few months before going ex-dividend, sentiment is bad, trend is down, high P/E.

And so I'll be looking to trade and reverse the impending short covering rally because of it.

 

[Knobby22]

I would like to own this company but would need to see an SP near $50. This would get the dividend near 5% yield (though not fully franked) which would help the decision a lot.