There is no doubt bionic ear-maker Cochlear Limited (ASX: COH) has provided long term shareholders with a roller-coaster ride over the last five years. Since the well known product recall in 2011 and fears of cheaper imitations flooding the market in 2013, the stock has averaged a total shareholder return of only 5.5% each year over the last five years.
This is far less than its healthcare listed peers CSL Limited (ASX: CSL) and ResMed Inc. (CHESS) (ASX: RMD). Nevertheless, Cochlear promises better results in the future and is seems the market has high expectations with shares trading at a significant premium to the rest of the healthcare sector.
Cochlear is the global leader in implantable hearing devices and has been at the forefront in research and development of hearing devices for over three decades. Cochlear sells its products in over 100 countries and there remains a huge unmet clinical need for millions of people who could benefit from its devices.
Cochlear has a strong reputation for researching and developing the highest quality products that utilise the most cutting-edge technology. While the device recall in 2011 may have partially damaged the company's reputation, it has worked hard to restore this reputation with new devices such at its latest Nucleus 6 product.
Nucleus 6 has already proven itself a success by helping Cochlear achieve record first half 2015 revenues of $440.5 million – a 17% increase against the prior corresponding period. Investors will hope the momentum continues for the remainder of FY15 with shares trading on a price-to-earnings ratio of around 30 times forecast 2015 earnings. If these expectations are not met, shareholders should brace for more volatility.
Cochlear has not provided any revenue guidance for the full year but it does expect steady growth for the second half of the year. New accessories and approvals for Nucleus 6 have been positive so far and further product launches are expected for the remainder of the year. The majority of Cochlear's earnings come from international markets so any further falls to the Australian dollar will be beneficial to Australian investors.
Although there has been strong momentum in Cochlear's share price over the past year, there are some factors investors should be aware of. The company recently announced the appointment of a new CEO to replace the current long-serving CEO Dr Chris Roberts. Management is one of the key elements in executing a successful business plan and investors should be cautious any-time key personnel are replaced. While the fear of cheaper competitors has been overplayed in the past, there is always the risk Cochlear may lose market share to new entrants with inferior devices.
Foolish takeaway
Cochlear is a high quality company whose earnings are expected to grow steadily over the coming years as it tries to meet the increasing demand for hearing devices. Although the share price has fallen from its recent highs, I would be inclined to wait until the share price falls further or until the full year results are released in August to see if sales momentum has continued. Cochlear could make for an excellent long-term investment and is definitely a stock I will keep on my watchlist.
