Hearing aid maker Cochlear Limited (ASX: COH) announced a big fall in net profit for financial year 2014, but a strong end to the year seems to have convinced investors there's a bright outlook ahead.
Net profit after tax, excluding provisions for a legal dispute, was down around 17% on the prior year to $109.5 million on $804.9 million of revenue. Even though revenue for the full year was up on the prior year, the net profit was down mainly due to increased administrative and operational expenses.
The Americas and Europe Middle East and Asia saw roughly equal sales growth on the prior half, whereas the Asia Pacific region grew more strongly, supported by the delivery of a large Chinese Central Government contract in the second half of the financial year.
Chief executive Dr Chris Roberts emphasised the strong sales growth seen in the second half of the year to impress upon investors the effect of new product launches and their initial success in the market. Second half sales revenue for FY 2014 was up 18% on the first half, as five new core products launched over the prior year contributed to the growth.
Cochlear has faced increasing pressure recently from low-cost competitors in the Asia Pacific markets and from Swiss competitor, Sonova, in the key European and North American markets. Although the overall hearing aid market is growing sufficiently to support many successful operators, Sonova's recent growth is thought to have been so rapid that it has effectively taken market share from Cochlear.
However, Cochlear and the market appear to be looking to FY 2015 as a fightback year in which the momentum evidently gained from new product releases carries on into the future.
Cochlear shares were up 7.7% in morning trade to $67.36 placing on it a price earnings of 40, based on full-year earnings of 164.6 cents per share.
At that valuation the market is expecting strong sales growth into the future, no more disappointment over product launches, and a return to sales strength based on a best-in-class reputation. Any mishaps will likely see the price come under intense pressure.
After a distinctly average FY 2014, I think Cochlear looks a hold at best. It will need a highly successful FY 2015 to support the current valuation and I would not be chasing it at today's prices.
The final dividend of $1.27 per share took the full year dividend to $2.54 per share, up 1% on the prior year. The business yields 3.7% on current prices.
