In my view, one of the most appealing sectors in which to invest is healthcare. That's because an ageing population is forecast to cause a rise in demand for healthcare services in the coming years. This should benefit healthcare companies such as Cochlear Limited (ASX: COH), Ramsay Health Care Limited (ASX: RHC) and CSL Limited (ASX:CSL).
In Cochlear's case it already has a large market in which it can increase its exposure. It also has a high degree of customer loyalty and the financial firepower to invest in product innovation.
Market Opportunity
According to non-profit organisation Hear-It AISBL, around 600 million people across the world are affected by hearing loss. Of these people, approximately 250 million are classed as suffering from moderate to profound hearing loss. This makes them suitable candidates for Cochlear's hearing systems.
However, cost barriers mean that the majority of those 250 million people cannot afford a hearing system. Therefore, Cochlear's target market is estimated to be approximately 25 million people in total across the world. Only 2% of this number have hearing devices at the present time, with half of them having a Cochlear device. Therefore, Cochlear supplies an estimated 1% of its total target market. In my view this presents it with a long term growth opportunity even without the prospect of an ageing population being taken into account.
Customer Loyalty
Cochlear's product recall in 2011 was a disappointment for its investors and caused its share price to fall by up to 46% in the aftermath. However, it cemented Cochlear's reputation for quality and transparency among medical practitioners and customers. That's because the product recall was a conservative step to take since only 1% of products in question were adversely affected. It was also undertaken swiftly.
The effect of it was to improve customer confidence and loyalty towards Cochlear's products. This has helped the company to build a competitive advantage versus its peers. Higher margins and more stable demand for its products are the end result. This makes Cochlear more profitable and also less risky versus its sector and index peers.
Financial Standing
Cochlear's competitive advantage has also been aided by its investment in new product development. In recent years it has spent between 10% and 15% of revenue on product innovation. This has been possible because of its financial standing. For example, Cochlear has a net debt to equity ratio of 26%. Its interest payments were covered 30 times by operating profit in financial year 2016.
Further, Cochlear's cash flow provides scope to increase investment spending in future. Its free cash flow was $156 million in the 2016 financial year. This covered dividend payments 1.3 times. In my opinion, this indicates that Cochlear could invest more heavily in future growth opportunities without compromising its financial stability.
Cochlear benefits from a competitive advantage versus peers, a growing market for its product and sound finances. Therefore, it could help investors to turn $10,000 into $8 million, just as this man did.
