With the Aussie economy continuing to experience a rather uncertain outlook, it is perhaps unsurprising that health care stocks continue to be popular among investors. After all, their profitability and returns are less highly correlated with the performance of the wider economy and of the ASX respectively, thereby making them great defensive stocks.
In addition, health care companies such as Cochlear Limited (ASX: COH) offer excellent growth potential. For example, it is expected to increase its net profit by a whopping 93% over the next two years, as new products such as Nucleus 6 help the company to boost its top and bottom lines, as well as overcome the disappointment of the major product recall which occurred four years ago. And, while the experience of that may still not have evaporated completely, as more time passes it is less likely to harm both customer sentiment and investor sentiment towards the company.
In fact, Cochlear appears to be more appealing on the growth front than pharmaceutical peer, CSL Limited (ASX: CSL). It is expected to increase its bottom line by 44% during the same time period and, while this would represent a superb level of performance, it is less than half the anticipated growth rate of Cochlear.
Furthermore, Cochlear offers investors a potentially less volatile shareholder experience. Evidence of this can be seen in the company’s beta which stands at just 0.5. This means that for every 1% change in the ASX, Cochlear’s share price should move by just 0.5% and, with CSL having a beta of 0.6, Cochlear may be better suited to periods of volatility in the wider market.
In addition, Cochlear offers investors a 2.8% yield which, while less than the ASX’s yield of 4.5%, is much more appealing than CSL’s 1.6% yield. And, with dividends set to be covered 1.4 times by profit next year, there appears to be significant scope for an uplift in Cochlear’s dividend payments moving forward.
Of course, where Cochlear lacks appeal versus CSL is with regard to its track record of profitability. For example, during the last five years Cochlear has seen its net profit fall at an annualised rate of 6.8%, while CSL’s bottom line has grown by 10.8% per annum. As such, it is likely that investors will have more confidence regarding CSL’s long-term performance than that of Cochlear.
However, with a number of new products in the pipeline and a new CEO set to refresh the company’s strategy, its past performance is unlikely to be an accurate guide to its future performance. Furthermore, Cochlear seems to have a sufficiently wide margin of safety to provide an appealing risk/reward ratio, with its price to earnings growth (PEG) ratio being just 0.75 versus 1.15 for CSL.
As such, and while CSL is an appealing stock for long-term investors, Cochlear seems to have the edge on its health care peer.