The Cochlear Ltd (ASX: COH) share price edged higher in morning trade after the group revealed a strong result for the six-month period ending December 31 2016. Below is a summary of the result:
- Net profit of $111.4 million, up 19% over the prior corresponding period (pcp)
- Sales revenue up 8% in constant currency terms to $604.4 million (up 4% in Australian dollar terms)
- Cochlear implant units sold up 10% to 16,324
- Basic earnings per share of $1.94 up 18% on pcp
- Interim dividend up 18% to $1.30 per share fully franked
- FY17 net profit guidance maintained at $210 million to $225 million, up 10%-20% on FY16
- Net debt fell by $24 million from June 2016 to stand at $93.5 million
Highlights
Overall, this is another strong half year from the implantable hearing aid manufacturer that enjoys the competitive advantages and pricing power of market-leading medical device products. The complex medical science and technology behind the products means this sector retains high barriers to entry as it's hard for startups or competitors to compete with companies in the hearing technology space like Cochlear.
The company also continues to invest to maintain its earnings growth moat or all-important market-leading position with 12% of sales revenues, or $72.2 million pumped back into research and development over the period.
It's also worth noting that the company's services business that generates recurring revenues on high margins saw modest constant currency revenue growth of 3%, with the core Americas and EMEA region delivering 6% growth.
Lowlights
Readers will notice the constant currency numbers are generally stronger than the reported numbers as Cochlear faced the headwind of a stronger Australian dollar over the period as commodity prices continue to soar. This could easily reverse over the months ahead however and is not a major impediment to the investment case.
The other disappointment was the falling sales growth in China as the one-party government tendered only 1,100 units over the half, compared to 1,700 in the prior period. As other Australian companies like Bellamy's Australia Ltd (ASX: BAL) and Ramsay Health Care Limited (ASX: RHC) know it is hard to deal with a communist government that often has its members' financial self-interests at heart.
Outlook
Cochlear remains perhaps the best long-term growth stock on the ASX in my opinion, although it's no secret with shares changing hands on around 33x analysts' estimates for full year earnings per share of $3.96. The dividend yield should be in the region of 2% over the year ahead for anyone buying shares on today's valuation of $132.40.
These estimates reflect expectations for the company to meet the top end of its own full year profit guidance of between $210 million to $225 million.
I would stay patient and look to buy the stock around 10% cheaper at $120 as I expect the opportunity may come up before it reports its full year results in August 2016.
