Since the start of the year, Cochlear Limited (ASX: COH) has risen by 49%. That's ahead of healthcare peers Ramsay Health Care Limited (ASX: RHC) and CSL Limited (ASX: CSL). They are up by 16% and 2% respectively. Cochlear's rapid gain may lead some investors to question if it is now overpriced. But in my view, its outlook is bright.
Demographic trends
A key reason for Cochlear's bright long term future is global demographic trends. The world's population is forecast to rise from 7.3 billion today to 9.7 billion by 2050 according to the UN. The rate of growth of people aged 60 or above is expected to be even more dramatic. Their number is due to double by 2050 and treble by 2100. Alongside a rising life expectancy, this means that demand for healthcare products and services should rise.
This is good news for Cochlear, since older people are more likely to require hearing devices. It will increase the size of Cochlear's target market and should provide a growing customer base without Cochlear being required to increase its market share from current levels.
Increasing sales
However, an increase in Cochlear's market share is on the cards. The company currently only supplies 1% of its total target market. As wealth levels across the developing world rise, it is likely that this figure will increase as hearing devices become more affordable.
Further, Cochlear has an excellent reputation among consumers. This provides a competitive advantage versus its peers. Its product recall in 2011 was initially viewed as a negative by investors. Cochlear's shares plunged by over a third in the aftermath but have since recovered. The recall is now seen as a prudent and conservative move by Cochlear which put customers, rather than the company's bottom line, first. This has enhanced the company's reputation and created a significant amount of customer loyalty towards Cochlear products.
Outlook
Cochlear is focused on expanding its technological advantage versus rivals in the near term. Over the next 18 months, it expects to introduce a series of new products which focus on both share and market growth. It will also build on its direct-to-customer marketing strategy in the US to increase awareness of hearing loss. Learnings from the US market are now being employed globally.
Allied to this strategy is a growing market for Cochlear's products as a result of population growth and an ageing population. Further, its reputation means that market share gains are relatively likely. In my view now is the right time to buy Cochlear for the long term.
