COH - Cochlear Limited

[McCoy Pauley]

New product launch announcement sees COH shares rise more than 3% in morning trade this morning. The Nucleus Profile Implant series with the Contour Advance electrode is the first in the new Profile Series will be launched in Europe through June. It's based on the CI500 series of implants and apparently has the thinnest implant body on the market.

Announcement here: http://www.asx.com.au/asxpdf/20140602/pdf/42pz4rhtq6kgwj.pdf

I assume that the release will not affect FY13 earnings given it's launched in the last month of the financial year, but I'll be interested to see if COH can claw back lost market share in Europe with this new product offering.

In the interest of full disclosure, I hold.

 

[McCoy Pauley]

As always, any studies picked up by the media will have attention grabbing headlines.
That is something to keep watch on though, if I (or my child) was getting an implant - this is something I would be investigating.


I can confirm I read that this is the case this morning, from Merrill Lynch: "Cochlear has revealed it is investing in direct clinic ownership in certain sites and has opened its first in Melbourne. The broker believes this strategy, indicative of the growth challenges in the industry, has the potential to provide insights into patient capture that have previously been absent."

That's one way of looking at it (thanks VSntchr for posting the excerpt). COH has traditionally relied on doctors and surgeons to market COH's implants ahead of implants from competitors and presumably part of COH's historically high margins was because it didn't need to spend a great deal each year on marketing and sales.

While it's great to see that COH isn't resting on its laurels (and lord knows it doesn't given the market share it's ceded to its competitors), I assume that the more direct clinics it acquires and operates, the higher COH's expenditure on marketing and sales will be, which will likely affect the capacity of COH to drive product innovation into the future.

Further, I assume that COH isn't necessarily relying on its current management to operate these ownership and they're hiring people to run them effectively.

 

[McLovin]

Interesting result out today. I've only had a brief look but it seems to me that most of the revenue gains can be put down to two things...

1) Upgrading to new product accounted for 13% of revenue; unless they start churning out a new product like Holden churns out a new Commodore every six months there's a fair bit of one offishness to this.

2) Fall in the AUD. Constant currency sales were; +2% Americas, +10% EMEA, -9% APAC. The APAC number is a concern, imo, because that, and LATAM, is where future organic growth will come from.

Maybe I'm being too pessimistic but this doesn't strike me as a stellar result. The company is still facing headwinds from Sonera and is trading on a pretty hefty multiple.

 

[McCoy Pauley]

Interesting result out today. I've only had a brief look but it seems to me that most of the revenue gains can be put down to two things...

1) Upgrading to new product accounted for 13% of revenue; unless they start churning out a new product like Holden churns out a new Commodore every six months there's a fair bit of one offishness to this.

2) Fall in the AUD. Constant currency sales were; +2% Americas, +10% EMEA, -9% APAC. The APAC number is a concern, imo, because that, and LATAM, is where future organic growth will come from.

Maybe I'm being too pessimistic but this doesn't strike me as a stellar result. The company is still facing headwinds from Sonera and is trading on a pretty hefty multiple.

The 6.5% jump so far this morning seems to me to be driven by short sellers having to cover their position because reading their results, I do not see how the current price is justified at the moment.

Cochlear implant sales fell 3% in the financial year, although sales in the second half outstripped sales in the first half quite significantly. Most of the rise in the sales revenue was driven by a falling Australian dollar, with sales revenue up by 3% on constant currency terms.

Cochlear started selling the Nucleus 6 sound processor in Europe and US during the financial year, but still (as at 30 June) hadn't received full approvals from the FDA for all features. The Nucleus CI512 was launched in Europe and in Asia in the fourth quarter and is awaiting approvals elsewhere.

For as long as I can recall, Cochlear relied on the surgeons and medical practitioners to recommend Cochlear's products over their competitors' products. But Cochlear invested an additional $10 million in so-called strategic growth initiatives to grow and support the market for cochlear implants. This implies to me that Cochlear is finding it more difficult to convince medical practitioners to recommend Cochlear products over their competitors' products. Anecdotally, I've noticed in the last few months that Cochlear has opened a clinic in East Melbourne.

The Asia-Pacific result was clearly negatively impacted by Cochlear's failure to sell units into China (1800 in the second half of 2013/2014 sold compared to 2800 in the previous financial year).

There was no guidance provided for next year's results, beyond some vague references to the opportunities and risks that confront Cochlear.

Debt to equity ratio is 72% compared to 49% last financial year. From memory, I think Cochlear borrowed money to fund its dividend payment in the hope of supporting its share price.

I sold out some of my holdings after the half-year report and consequently have missed the run-up in share price, but I'm not entirely convinced that Cochlear is on the right track. I'll continue to hold the remainder of the holdings (mostly due to the huge CGT liability I would incur should I sell) but I'm not comfortable enough to buy back in on the strength of this result.

 

[skc]

Maybe I'm being too pessimistic but this doesn't strike me as a stellar result. The company is still facing headwinds from Sonera and is trading on a pretty hefty multiple.

If you annualise the H2 numbers then forward multiple is ~25x... which is probably slightly lower than where they have traded historically (granted that it was a somewhat different company, historically).

The 6.5% jump so far this morning seems to me to be driven by short sellers having to cover their position because reading their results, I do not see how the current price is justified at the moment.

Yes. Most shorted stock on ASX. I caught about $2.80 on the spike, but then gave a bit back trying to short it from the morning top.

I sold out some of my holdings after the half-year report and consequently have missed the run-up in share price, but I'm not entirely convinced that Cochlear is on the right track. I'll continue to hold the remainder of the holdings (mostly due to the huge CGT liability I would incur should I sell) but I'm not comfortable enough to buy back in on the strength of this result.

May be worthwhile looking for some form of hedge?

Debt to equity ratio is 72% compared to 49% last financial year. From memory, I think Cochlear borrowed money to fund its dividend payment in the hope of supporting its share price.

Yes...albeit not as bad as last report. Operating cashflow $111m, investing -$32m, dividends paid -$145m and net borrowing $67m.

Just hit $68. I say this finishes at close to the high today, opens higher tomorrow and gets sold back down to $64 before end of the week.

 

[McLovin]

If you annualise the H2 numbers then forward multiple is ~25x... which is probably slightly lower than where they have traded historically (granted that it was a somewhat different company, historically).

Except that the H2 is when they released the new units, which accounted for 13% of annual revenue so c.p. 26% of H2 revenue (H214 sales were up 28% on H213...which looks almost like it the entire difference was upgraders). I'm not sure I'd trust the results of H2 as a foundation for extrapolating forward.

Up 9% today, so I must be missing something here!

 

[McCoy Pauley]

Having a bit of a closer look, COH put aside about $22.5 million for the patent dispute which COH lost but is appealing. Add that back to the NPAT, and underlying NPAT becomes $109.5 million for the twelve months, which would be above consensus.

I think a lot of people buying in today are hoping that the company's performance has finally bottomed out and that the results from the second half of the financial year set the scene for an uptick in the company's performance going forward.

 

[VSntchr]

Just hit $68. I say this finishes at close to the high today, opens higher tomorrow and gets sold back down to $64 before end of the week.

Didn't open higher but has since surged higher....almost at $71 now...
I tend to agree that it will probably end the week closer to where it started.

Funny that all the broker reports coming out this morning are sell, reduce or neutral at best..yet it goes up another 2%...surely its a squeeze right?!

 

[McLovin]

Funny that all the broker reports coming out this morning are sell, reduce or neutral at best..yet it goes up another 2%...surely its a squeeze right?!

Yeah. This from Macquarie today is pretty typical.

Underlying patient growth however remains elusive: Although growth was
impressive for BAHA (+21% cc in 2H) and sound processor upgrades (+14%
cc in F14), the best measure of underlying growth for COH remains new
patient unit sales due to it (i) accounting for 74% of group sales and (ii) not
being subject to product cycle volatility (c.f. upgrades which were inflated this
period from the recent N6 launch). Unfortunately unit sales growth remains
worrying low at only +1.4% for the year and +3.2% for 2H – something we
have difficultly reconciling with COH’s 1y fwd PER of 28.2x.

 Difficult for us to see a turnaround in growth anytime soon: Management
yesterday again pointed to investment in technology and improving patient
outcomes as the central strategy for growth. With the rate of CI innovation
slowing and product features not being a large driver of industry growth in our
view, we struggle with COH’s ongoing heavy spend in R&D and believe the
solution instead lies in the development of an effective channel to reach the
large underpenetrated adult segment. This however appears to be of
relatively low priority for management.

 Dividend could be cut by 30%+ in F15: COH yesterday announced that its
Board expects a reduction in the dividend payout ratio for F15 to historical
norms of ~70% (cf 2H ratio of 109%). Based on our earnings forecasts this
equates to a DPS of 169c in F15, a 33% cut from this year and below what
COH paid in F09. In addition to the direct financial impact to shareholders, this
move will likely raise further concerns about the growth outlook.

 

[McCoy Pauley]

The brokers have been consistently bearish on COH for some months now, but the share price has been moving in the opposite direction.

I concur with Macquarie's analysis of the results. They don't read to me as a set of results that would support the share price spike we've seen since their release.

I'm still continuing to hold but I'm not likely to rush out and buy more at this point.

 

[McCoy Pauley]

According to the AFR Street Talk column, relying on data compiled by CBA Equities and ASIC, Cochlear remains the second most shorted stock on the ASX-200, with 15.4% of the stock on offer still shorted, compared to 16.1% last week.

 

[edgykativu]

not so good looking you cant beat the asian on making cheap stuff

 

[trinity168]

not so good looking you cant beat the asian on making cheap stuff

How willing are people to buy the cheap knockoff?

 

[mahen142]

Cochlear (COH)

Anyone investing in Cochlear (ASX:COH)? Would it be a good investment to get into at the moment?

 

[JJZ]

Not a good day for COH today, was there an announcement? I cant find any reason behind this....

 

[qldfrog]

was wondering as well; fall of AUD should logically increase COH?

 

[Porper]

Not too concerning as COH can have a few wide ranging bars. However, wouldn't want to see too many more day's like today. Maybe it needs to come down to revisit minor support around $107 before resuming higher.

I hold.

 

[Triathlete]

I would not be to concerned with COH today.

I have added my analysis of COH.

If we look at the last retracement range No2 red to No 1 red we can see that it retraced only 38.2 % this indicates that at this point in time the stock is strong and will likely move up 100% which it almost got to $117.26...we can see the natural level at $117 and the 100% level at $118.91.

This stock seems to move in around $12.50 moves and as you can see on the chart we have a resistance level here at $117.

What I would be looking for from here is to see if the stock comes back no more than 50% retracement $97 and then continues its move up.

Fundamentals from stock doctor.

EPS 26.82
Lincoln valuation $90.02
Consensus valuation $98.55

 

[skc]

Not a good day for COH today, was there an announcement? I cant find any reason behind this....

The perfect ruler indicates an institution selling with a bot in a controlled manner. It wasn't a massive dump as would be the case if it was news driven. So most likely just someone rebalancing their portfolio.

COH has been hot in the last 2 weeks and today's move barely bring it back to the level 4 days ago.

Technically perhaps more profit taking. Fundamentally I don't think you can read anything into it.

 

[Tano]

Hi All, Im a student doing a Cost of Capital assignment and i am a little confused about calculating the cost of equity using CAPM. Can anyone confirm if these figures look correct?


All Ords Market Return for July 1st 2015- June 30th 2016 (All Ordinaries weekly closing prices)
= (Final Index Value - Initial Index Value) / Initial Index value
= ( 5,310.40 -5,528.00 )/ 5,528.40
= -3.94%

Cochlear Return
Capital Gain = (Final Weekly Closing Share Price - Initial Share Price)/ Initial Share Price
=($119.73 - $77.49) / $77.49
= 54.51%

Then use excel regression analysis using the weekly closing prices for All Ords vs Cochlear (adjusted for dividends) and we get a beta of 0.28. How can the beta be so low and cochlear returns ~ 54% share growth vs all ords 3.94% loss?

Rf= 10 year aus government bond yield - 1.9%
Re = 1.9% + 0.28 (-3.94% -1.9% )
=1.35%

Note: In financials has calculated the levered beta at 0.17 but may have use daily closing prices and a different date range
http://www.infinancials.com/fe-en/30097AA/Cochlear-Limited/Beta