3 reasons why I’d buy Cochlear Limited shares today

Credit: Unsplash

In my view, one of the most appealing sectors in which to invest is healthcare. That’s because an ageing population is forecast to cause a rise in demand for healthcare services in the coming years. This should benefit healthcare companies such as Cochlear Limited (ASX: COH), Ramsay Health Care Limited (ASX: RHC) and CSL Limited (ASX:CSL).

In Cochlear’s case it already has a large market in which it can increase its exposure. It also has a high degree of customer loyalty and the financial firepower to invest in product innovation.

Market Opportunity

According to non-profit organisation Hear-It AISBL, around 600 million people across the world are affected by hearing loss. Of these people, approximately 250 million are classed as suffering from moderate to profound hearing loss. This makes them suitable candidates for Cochlear’s hearing systems.

However, cost barriers mean that the majority of those 250 million people cannot afford a hearing system. Therefore, Cochlear’s target market is estimated to be approximately 25 million people in total across the world. Only 2% of this number have hearing devices at the present time, with half of them having a Cochlear device. Therefore, Cochlear supplies an estimated 1% of its total target market. In my view this presents it with a long term growth opportunity even without the prospect of an ageing population being taken into account.

Customer Loyalty

Cochlear’s product recall in 2011 was a disappointment for its investors and caused its share price to fall by up to 46% in the aftermath. However, it cemented Cochlear’s reputation for quality and transparency among medical practitioners and customers. That’s because the product recall was a conservative step to take since only 1% of products in question were adversely affected. It was also undertaken swiftly.

The effect of it was to improve customer confidence and loyalty towards Cochlear’s products. This has helped the company to build a competitive advantage versus its peers. Higher margins and more stable demand for its products are the end result. This makes Cochlear more profitable and also less risky versus its sector and index peers.

Financial Standing

Cochlear’s competitive advantage has also been aided by its investment in new product development. In recent years it has spent between 10% and 15% of revenue on product innovation. This has been possible because of its financial standing. For example, Cochlear has a net debt to equity ratio of 26%. Its interest payments were covered 30 times by operating profit in financial year 2016.

Further, Cochlear’s cash flow provides scope to increase investment spending in future. Its free cash flow was $156 million in the 2016 financial year. This covered dividend payments 1.3 times. In my opinion, this indicates that Cochlear could invest more heavily in future growth opportunities without compromising its financial stability.

Cochlear benefits from a competitive advantage versus peers, a growing market for its product and sound finances. Therefore, it could help investors to turn $10,000 into $8 million, just as this man did.

How 1 Man Turned $10K Into Over $8 Million

Discover how one man turned a modest $10,600 investment into an $8,016,867 fortune. Learn more about this man and how you can start down the path toward financial independence. Simply click here to learn more.

Motley Fool contributor Robert Stephens has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.