Cochlear Limited holds AGM: Are the shares a buy?

Annual general meeting season is once again upon us and today it is the turn of management and shareholders of one of the highest quality companies in the healthcare sector to come together.

The company in question is of course Cochlear Limited (ASX: COH). The implantable hearing solutions provider has had another fantastic year both as a business and on the ASX boards.

Cochlear’s shares have risen a massive 43% year to date and it doesn’t come as a huge surprise to me. In FY 2016 the company delivered a 23% increase in sales revenue to $1.2 billion.

Pleasingly there was not only strong growth across both developed and emerging markets, but all areas of the business performed extremely well. The Services segment was a particular highlight, growing sales revenue by 30% year on year to become approximately 25% of total company sales revenue.

Thanks to improvements in its margins Cochlear grew its earnings at an even quicker rate. Net profit after tax came in 30% higher than last year at $189 million.

A key driver in the strong result has been its focus on research and development (R&D) in the last few years. During the year the company introduced a number of ground-breaking new products that have cemented its position as the leader in the industry.

The majority of this R&D occurs here in Australia at present, but this could be about to change following the government’s decision to cut back its R&D tax concession.

Cochlear’s Chairman Rick Holliday-Smith hinted in his AGM address that Cochlear may be forced to take its R&D elsewhere if the incentives are taken away. The loss of upwards of $140 million a year in R&D activities would certainly be a blow to the economy, especially if others follow suit.

No changes are expected this year, but outside of that the company will no doubt be exploring its options.

For the year ahead management has provided net profit guidance in the range of $210 million to $225 million, which will be an increase of 10% to 20% on FY 2016’s result.

Although I hold Cochlear in high regard, I wouldn’t rush into an investment in the company today. At 40x full year earnings its shares are a little too expensive for my tastes considering its profit growth guidance.

Whilst management does have a habit of under-promising and over-delivering, I would still suggest investors hold back and wait for a more opportune entry point. Investors might want to take a look at investing in either Healthscope Ltd (ASX: HSO) or ResMed Inc. (CHESS) (ASX: RMD) at this point in time instead.

Alternatively these rapidly growing shares could be next in line to bolt higher if you ask me. Each has been producing stunning earnings growth and this looks set to continue in my view.

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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.

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