Hearing implant manufacturer Cochlear Limited (ASX:COH) has not had a positive start to 2018, with with its share price down 3.5% to $165.20 at the time of writing. Shareholders of Cochlear enjoyed a stellar 2017 as its share price soared 40% following another excellent operational performance.
However, since hitting an intra day high of $187.60 on November 28, Cochlear shares have lost 12% despite the bullish sentiment across global equity markets. Fellow large cap healthcare stock CSL Limited (ASX: CSL) has also seen a fall from its late November highs but not to the degree of Cochlear's.
Why are its shares down?
The recent appreciation of the AUD/USD and profit taking could explain the downward momentum since late November as Cochlear has not released any market sensitive announcements over the period that would precipitate such a decline.
The AUD/USD 2017 high was in early September around the 81 cents level. A steep fall over the next 3 months saw it bottom at the low around 75 cents level in early December. During that period, Cochlear shares surged from the high $150's to new all time highs of $187.60 in late November.
It's not a perfect correlation but the reversal of trend in the Australian dollar over the last several weeks to 79.5 cents has seen Cochlear's share price fall.
Foreign exchange movements impact stocks like Cochlear because of the substantial amount of revenues generated offshore. In the 2017 financial year, Cochlear earned only 17% of its $1.24 billion in revenues in the Asia Pacific. 48% of the company's revenues were earned in the Americas region and the remaining 35% were generated in the EMEA (Europe, Middle East, Africa) region.
I suspect there was also some profit taking given the surge in Cochlear's share price. UK Investment management firm and substantial shareholder Baillie Gifford has reduced its ownership interest in Cochlear from 9.44% to 8.43% following an announcement issued on December 22.
Time to buy?
Cochlear is a great Australian company whose track record and growth prospects are worthy of trading at an above average market multiple. Determining the level of the premium is the difficult part of the equation.
At current prices, Cochlear is projected to earn around $4.44 in FY18 which means the stock trades at forward P/E of around 37.
The market is still pricing a significant beat of expectations for Cochlear given management guided for a 10% growth at constant currency in FY18. The company is expected to announce its half yearly earnings on February 13 and will need to deliver. If it's unable to deliver, an even better buying opportunity could eventuate.
