Is it time to sell your Cochlear Limited shares?

It has been a great year for Cochlear Limited (ASX:COH) shareholders so far. But with its shares trading at 40x full year earnings, is it time to sell?

| More on:

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

So far in 2016 one of the best performing shares on the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) has been Cochlear Limited (ASX: COH).

The shares of the implantable hearing solutions provider have climbed higher by a massive 47% since the turn of the year to $140 currently, compared to a paltry 3.5% gain by the S&P/ASX 200 index.

Solid top and bottom line growth have been the catalyst for the strong performance. In August Cochlear reported bumper full year profits of $190 million on revenue of $1.2 billion. This was an increase of 30% and 23% respectively over the prior year.

A key driver of this growth was the performance of its Asia-Pacific segment. The segment saw revenue increase 31% to $210.5 million, with the Australian and China markets a particular highlight.

New marketing programs and the expansion of field sales led to a 10% increase in unit growth in the Australian market. Over in China, the company performed well in both private pay and tender market. According to management, the region benefited from Chinese Central Government tenders of around 3,300 units.

But could this bumper profit growth be coming under pressure? According to a report in the Australian Financial Review, it could be.

The report reveals that one of Cochlear's biggest rivals expects competitive pressures to drive down the price that the Chinese government pays for hearing implants via its public tenders.

With the average implant price for public tenders down by 25% to approximately $7,838 in the last two years, Swiss giant Sonova is expecting profitability in the space to be squeezed considerably due to the fierce price war.

Although the Americas, Europe, and the Middle East are by far Cochlear's biggest markets and contribute 82% of total sales , I'm sure many investors see the lucrative China market as a key driver of future growth.

If profits in China's public tender market are squeezed and growth in the region slows, then it may be difficult to justify the 40x full year earnings premium at a share price of around $140 today. I believe this could put its shares at risk of a spot of profit taking in the next few months, especially after such a strong rally this year.

Although I think Cochlear is a fantastic company, at the current price I would hold off on an investment. Other healthcare shares such as ResMed Inc. (CHESS) (ASX: RMD) and Sonic Healthcare Limited (ASX: SHL) could prove to be better options for investors right now in my opinion.

Motley Fool contributor James Mickleboro 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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »