COH - Cochlear Limited

[McCoy Pauley]

Yesterday's bounce looks like it was a dead cat bounce. Down 6% and still falling this morning.

ETA - found the probable reason. A rival of COH announced the US launch of its new model. Perfectly timed to take advantage of COH's recall.

 

[skc]

Yesterday's bounce looks like it was a dead cat bounce. Down 6% and still falling this morning.

No shortage of buyers but the sellers are un-relenting. Down ~8% now.

COH traded on a high PE ~18 and the PE compression alone will bring them down to a pretty ugly level. EPS $3.2 @ say 14x = $45 . And that hasn't even take into account any loss in earnings...

 

[McCoy Pauley]

No shortage of buyers but the sellers are un-relenting. Down ~8% now.

COH traded on a high PE ~18 and the PE compression alone will bring them down to a pretty ugly level. EPS $3.2 @ say 14x = $45 . And that hasn't even take into account any loss in earnings...

I wouldn't mind a piece of COH at $45/share. That would put it at the same level as back in the depths of the GFC.

Volume has spiked on COH this morning. Lot of sellers rushing for the exits this morning.

The P/E ratio was extremely high - pushed above 20x earlier this year. The recall signals a likely end to the high growth period of COH, at least for a few years, whilst COH deals with the reputational hit delivered by the recall. But as Malcolm Maiden pointed out on Monday, it's not the first time COH has dealt with issues dealing with reputation and, in the long run, by being so cautious, it might actually benefit COH to have announced the voluntary recall. That's speculative, simply because COH doesn't know why there has been an increased failure rate with the Nucleus 5 line of implants, but being so proactive, there's a chance that COH can spin the recall to its advantage in the next few years.

As an extremely long-term (15+ years and counting) holder, I don't like to see the reduction in my holding, but depending on how far the price falls, this could be a great time to pick up a well-run company on the cheap.

 

[notting]

ETA - found the probable reason. A rival of COH announced the US launch of its new model. Perfectly timed to take advantage of COH's recall.

Yeah but I think they are doing the recall with an instant replacement leaving no room for an alternative to take advantage of the recall.
COH can swing pretty wildly. In isolation the recall is not a big deal.
The real issue is reputation and FDA scrutiny. May not be a huge deal as FDA is reportedly not necessary as COH stepped in prior to them becoming involved.
I should add that I have been buying it.

 

[McCoy Pauley]

Yeah but I think they are doing the recall with an instant replacement leaving no room for an alternative to take advantage of the recall.
COH can swing pretty wildly. In isolation the recall is not a big deal.
The real issue is reputation and FDA scrutiny. May not be a huge deal as FDA is reportedly not necessary as COH stepped in prior to them becoming involved.
I should add that I have been buying it.

The commentary I've read suggests that COH has to revert to an older model of its implant and that COH is not enforcing contracts to implant that older model. Surgeons will now be free to select implants offered by COH's rivals, which is why sellers are rushing to dump the stock today, because one of COH's rivals cannily announced a new model. COH also needs to start manufacturing the older model as COH doesn't apparently have many models in stock.

As I wrote earlier, the recall may not have that great an effect on COH in the long term, but given that it's the first recall in about 15 years, it certainly has a short-term reputational hit on COH. I recall attending a Bionic Ear Institute seminar last year during Engineering Week where the presenter (who worked with COH in its early years) noted that many of COH's competitors were plagued by recalls, but COH was not. I think that makes up a fair amount of COH's promotional materials, so that will need to be changed!

 

[skc]

I wouldn't mind a piece of COH at $45/share. That would put it at the same level as back in the depths of the GFC.

What has that got to do with anything?!

The P/E ratio was extremely high - pushed above 20x earlier this year. The recall signals a likely end to the high growth period of COH, at least for a few years, whilst COH deals with the reputational hit delivered by the recall.

COH had ~70% market share at the expense of their competitor's recall... now the shoe is on the other foot. Their future market share will really depends on how well / not well their competitor capitalise on this opportunity. Ultimately all players can only grow at the industry growth rate... anyone seen any projection on those?

Yeah but I think they are doing the recall with an instant replacement leaving no room for an alternative to take advantage of the recall.
COH can swing pretty wildly. In isolation the recall is not a big deal.
The real issue is reputation and FDA scrutiny. May not be a huge deal as FDA is reportedly not necessary as COH stepped in prior to them becoming involved.
I should add that I have been buying it.

Where did you read about instant replacement? I didn't think they have enough of the other model stockpiled for occassions like these...

I think there will be plenty of time to buy later when they announce the actual financial impact of this event. At $40 probably the worst case is priced in... but now I don't see the market as over-reacting yet imo.

 

[McLovin]

No shortage of buyers but the sellers are un-relenting. Down ~8% now.

COH traded on a high PE ~18 and the PE compression alone will bring them down to a pretty ugly level. EPS $3.2 @ say 14x = $45 . And that hasn't even take into account any loss in earnings...

I bought a bit on Monday expecting a bounce yesterday, it was smaller than I thought but I sold, happily.

I think you're spot on about PE compression, they had a big "never do anything wrong" premium built in which could go the way of the dodo. Having said that, I remember a case study about product recalls and J&J did one in the 80s because they were being super cautious and it actually improved their brand. I don't think this a company killer.

 

[McCoy Pauley]

What has that got to do with anything?!

okay..... Thought it fairly obvious - just giving some price history.

COH had ~70% market share at the expense of their competitor's recall... now the shoe is on the other foot. Their future market share will really depends on how well / not well their competitor capitalise on this opportunity. Ultimately all players can only grow at the industry growth rate... anyone seen any projection on those?

COH had about 65% market share before its competitor issued a recall. COH has consistently had the most technologically advanced and reliable cochlear implant on the market for years. To attribute COH's high market share to mis-steps from its competitors understates the technological edge COH built for itself over many years of research and development.

COH invests a considerable amount into its research and development each year. The recalled model was the thinnest and lightest implant ever devised, apparently.

Cochlear implants, of all varieties, also have little to no ability to permit the implanted to listen to music in the manner in which a person with normal hearing can listen to music. It's the holy grail of cochlear implants. The manufacturer that first brings to market an implant that allows the implanted to listen to music like most people with normal hearing will make a killing.

Saying that all industry players grow at the "industry growth rate" neglects the potential for further technological breakthroughs.

Where did you read about instant replacement? I didn't think they have enough of the other model stockpiled for occassions like these...

I think there will be plenty of time to buy later when they announce the actual financial impact of this event. At $40 probably the worst case is priced in... but now I don't see the market as over-reacting yet imo.

Agreed. The recalled model was COH's flagship model, I believe. There will be a potentially significant short-term hit to COH's bottom line.

 

[skc]

okay..... Thought it fairly obvious - just giving some price history.

My point was price history means little as the new news is new!

COH had about 65% market share before its competitor issued a recall. COH has consistently had the most technologically advanced cochlear implant on the market for years. To attribute COH's high market share to mis-steps from its competitors understates the technological edge COH built for itself over many years of research and development.

Yes COH has good products but at the same time they benefited (albeit unquantifiable) from the competitors perils. It's one of those hypotehticals that we would never know.

Saying that all industry players grow at the "industry growth rate" neglects the potential for further technological breakthroughs.

It's just depends on the definition of the industry... and if such projections capture possibilities of future tech breakthrough. Does the COH price premium include an element of "future technological breakthrough"? Dunno...

While I might sound very negative I am just flushing out my own thoughts and trying to see where a "safe" entry point is for my risk-adverse investment style.

Without further clarifications from management I would not buy until it's say 25% below a pessimistic scenario of $40. But if I did hold I would probably reduce exposure rather than selling out right, and certainly not buy more.

COH is a fantastic Australian success story and I wish them continued success, but my wish isn't enough to influence the potential risks in the situation.

Just broken $55...

 

[craft]

there will be plenty of time to buy.

I have never seen a long term bargain where this has not been the case. Unless you are a trader - I reckon the ‘urge’ to jump on a bargain before it disappears carries a significant message to be patient and give yourself time and room to evaluate developments.

 

[vkdirector]

Below $52 and does not look like there is a lot of support at the moment, I will be watching this stock for a while as i am not real keen on trying to catch a failing knife so will wait till most of the hyp around the stock settles down a bit.

 

[McCoy Pauley]

A new 52-week low made this afternoon. Very bearish day - down almost 15% now, and still dropping.

 

[McLovin]

I have never seen a long term bargain where this has not been the case. Unless you are a trader - I reckon the ‘urge’ to jump on a bargain before it disappears carries a significant message to be patient and give yourself time and room to evaluate developments.

Exactly, it's not like COH is really a "bargain" yet anyway. It's got a nosebleed PE that needs adjusting, as skc pointed out earlier.

Even a long term investor would be game to stick their neck out now and start buying; let the dust settle and let the company give some sort of guidance on what this will mean for the bottom line. They were pretty opaque in the announcement which leads me to believe they either don't know (possible) or they are being conservative and want to underpromise and over deliver (probable).

 

[McCoy Pauley]

My point was price history means little as the new news is new!

Fair enough.

Yes COH has good products but at the same time they benefited (albeit unquantifiable) from the competitors perils. It's one of those hypotehticals that we would never know.

There's no doubt that COH's revenue, profits and share price benefited from the fact that COH had the most reliable product on the market and that their competitors were forever dealing with product recalls and the regulators.

Now that COH has issued its own product recall, that point of differentiation has now disappeared and COH will be brought back into the pack. One bright spot is that COH wasn't forced into the recall by the regulators, unlike some of its competitors.

It's just depends on the definition of the industry... and if such projections capture possibilities of future tech breakthrough. Does the COH price premium include an element of "future technological breakthrough"? Dunno...

I agree that COH's high price reflected a high expectation for a strong rate of growth into the future. COH never predicted what would happen in the future when it reported results, but the market developed an expectation that it would consistently outperform previous years.

Some of the expectation would be centred around developments flowing from COH's heavy investment in research and development. Optimistically, the bearish sentiment on COH might be so bad that such expectation would be stripped out of the share price and if COH continues to develop its new and innovative products and recapture the market share it will lose over the recall, then that might put a rocket under the share price.

However, that's only speculation and to buy COH shares on that would be speculating on COH's future performance. Until and unless COH release further information about the recall's impact on COH performance, it's just guessing.

While I might sound very negative I am just flushing out my own thoughts and trying to see where a "safe" entry point is for my risk-adverse investment style.

Without further clarifications from management I would not buy until it's say 25% below a pessimistic scenario of $40. But if I did hold I would probably reduce exposure rather than selling out right, and certainly not buy more.

COH is a fantastic Australian success story and I wish them continued success, but my wish isn't enough to influence the potential risks in the situation.

Just broken $55...

My position is somewhat different, as the yield on my investment in COH approaches 100%. I couldn't find a better yielding stock to replace COH anywhere on the market and I'm not inclined to give the taxman a slice of my capital gains, either.

At the moment, COH is probably approaching what I consider to be its fair value on its released figures as at 30 June 2011, but given the financial impact of the recall on its 2011/2012 results, I'm waiting for more information before determining whether to buy more, and if so, at what level.

 

[McLovin]

Now that COH has issued its own product recall, that point of differentiation has now disappeared and COH will be brought back into the pack. One bright spot is that COH wasn't forced into the recall by the regulators, unlike some of its competitors.

As well as that, in the instance of Sonova's HiRes 90K devices they were actually causing severe pain in patients when they malfunctioned. A very important difference to the COH devices which automatically shut down. Technology fails every now and then, doctors accept that. The real test is how the company manages the recall, not the recall itself.

I heard a few audiologists being interviewed this morning and they didn't consider it something that would turn them off COH products.

 

[skc]

As well as that, in the instance of Sonova's HiRes 90K devices they were actually causing severe pain in patients when they malfunctioned. A very important difference to the COH devices which automatically shut down. Technology fails every now and then, doctors accept that. The real test is how the company manages the recall, not the recall itself.

I heard a few audiologists being interviewed this morning and they didn't consider it something that would turn them off COH products.

I was having a chat with a doctor and she didn't seem to concerned wrt reputational damage either... but most doctors I know knew very little in way of finance and investments let alone stock valuation ...

COH dipped below $50 and now clinging on by a few hair... probably at the mercy of the wider market whether it holds that level today...

 

[McCoy Pauley]

There was a rally this morning along the lines of the broader rally, but that's fizzled out and COH is now down another 2% so far. I wonder how much of the rally was driven by Eureka Report subscribers reading Roger Montgomery's article on COH in last night's newsletter and then recalling that he recommended MCE for months!

 

[McLovin]

I was having a chat with a doctor and she didn't seem to concerned wrt reputational damage either... but most doctors I know knew very little in way of finance and investments let alone stock valuation ...

Perhaps in this instance that might be a good thing?

I'm trying to tee up a phone chat with someone I know who used to be pretty high up (in sales too) at COH to see what they have to say about the recall. I think they're away atm though. If I can get on to them I'll post their thoughts on here.

 

[notting]

Toyota was making cars that accelerated people out of control!!!!
This is nothing!

I heard COH had instant replacements on TV, it may be wrong I have not seen anything that confirms it. It sounds wrong because it's an entire line that has an issue and they are still working out what the issue is so I think I might have said the wrong thing with regard to that. Sorry.

 

[Roberto]

Fair enough.

No, no, no, not fair enough, what do you mean SKC that price history is meaningless!
So you are a fundamentals only person? And an EMH person? Good luck with trying to make sense of the market by over simplifying things.