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Steer clear of Ten and Cochlear

The S&P/ASX 200 (ASX: XJO) on Friday hit a new five-and-a-half-year high of 5,321. This means that if you’d gone to sleep in mid-2008 and woken up today, the value of your ASX 200 index fund (ASX: STW) wouldn’t have changed — a poor return by anyone’s standards. During that time, however, some stocks have appreciated ten-fold, while others are worth a fraction of what they once were.

Two companies that have had similarly poor returns and look likely to underperform in the future are Cochlear (ASX: COH) and Ten Network Holdings (ASX: TEN).

Cochlear has returned less than 1% over the past five years. It suffered a damaging product recall in 2011 that wiped out a 40% gain over the previous three years, and a poor 2012 result has cut the share price by around 30% from the high this calendar year. Hearing aid maker Cochlear is pinning most of its hopes on the release of the new N6 processor during the 2013-14 financial year. So far it has received regulatory approval to sell the processor in Europe, while other major markets are expected to follow in 2013, though time is quickly running out.

Cochlear has traditionally traded on a price-to-earning premium to its competitors due to its superior products, however a number of analysts are concerned that the new processor is not sufficiently superior to its competitors’ to justify the premium anymore. Main competitor Advanced Bionics’ new processor has many similar features to the N6 and has captured market share from Cochlear’s aging technology while approvals are pending for the N6.

It should also be noted that dividends have been 130% of earnings, meaning that the company has to borrow to pay shareholders. If this continues, gearing may increase from the current 33% to over 47%. Overall, Cochlear’s future share price and dividend hangs on the success or otherwise of the N6.

Ten is similar to Cochlear in that its future hangs on a single source — the recovery of ratings by delivering original and compelling content through its free-to-air TV network. Ten delivered a net loss for the year to August 31 of $285 million, mainly as a result of non-recurring charges. CEO Hamish McLennan was refreshingly honest, noting that the result shows the extent of the turnaround required for the company. In 2013, Ten’s only hit show was MasterChef, which was outdone by My Kitchen Rules on Seven.

Ten’s share price has dropped by around 80% over the last five years and with few attractive shows to draw in viewers, there’s a strong doubt from many that the company can turn around quickly. A short-term fix may come from the Commonwealth and Winter Olympic Games, however these events will not draw in the type of recurring viewers the network requires.

Foolish takeaway

Cochlear and Ten appear to have more downside than upside ahead of them. The days of Cochlear’s dominance of the hearing aid market may be over and Ten is struggling to attract viewers as competition for market share and advertising dollars continues to intensify.

Ten doesn’t pay a dividend while Cochlear’s future dividends are far from certain. Discover The Motley Fool’s favourite income idea for 2013-2014 in our brand-new, FREE research report, including a full investment analysis! Simply click here for your FREE copy of “The Motley Fool’s Top Dividend Stock for 2013-2014.”

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Motley Fool contributor Andrew Mudie does not own shares in any of the companies mentioned.

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