Top broker downgrades Cochlear Limited shares to a sell rating

In morning trade the Cochlear Limited (ASX: COH) share price has fallen almost 1% to $179.99.

But as far as one leading broker is concerned, there could be more declines on the way.

Why are its shares lower today?

According to a note out of Citi this morning, analysts at the investment bank have downgraded Cochlear’s shares to a sell rating.

Although they have lifted the price target on its shares to $160, this is still almost 12% lower than its last close price.

While the broker believes that Cochlear is likely to deliver an exceptional result this year, it believes that its shares have run too hard and are overvalued now.

I would have to agree with Citi on this one. Although I think the implantable hearing solutions provider is one of the highest quality businesses in Australia, I wouldn’t be a buyer of its shares on valuation grounds.

After all, as of yesterday’s close Cochlear’s shares were changing hands at a lofty 46x trailing earnings.

I think this is too much of a premium given its outlook for FY 2018 of net profit after tax between $240 million and $250 million. This equates to year-on-year growth of between 7% and 11.6%.

In light of this, I would suggest investors avoid Cochlear until it trades on a more reasonable valuation and consider fellow healthcare shares Ramsay Health Care Limited (ASX: RHC) and CSL Limited (ASX: CSL) instead.

As well as CSL and Ramsay, I think these top shares are strong buys today.

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Motley Fool contributor James Mickleboro has no position in any of the 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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