MENU

Why the Cochlear Ltd share price is falling on its profit result

The Cochlear Ltd (ASX:COH) share price fell 3% to $166 this morning after the company released its half year results. Revenues at the hearing aid manufacturer grew 6% to $639.6 million, and statutory net profit after tax fell 1% to $110.8 million.

The decline in statutory net profit was due to a $5 million write-off of Cochlear’s deferred tax assets, a side effect of lower US corporate tax rates.

Over the full year, tax asset write-offs are expected to reduce net profit by around $3 million to $4 million, with tax savings starting to make a positive contribution in the second half (the lower tax rate went into effect on 1 January 2018).

From a business perspective, Cochlear’s business performed strongly with the number of units shipped in developed markets growing by 12%.

Units in emerging markets fell, which the company attributed to the timing of tenders, including a Chinese tender awarded in October 2017 that will start shipping in the second half. Currently the company has $107 million cash and cash equivalents in the bank, and has $244 million in debt.

Cochlear gave an outlook for the full year, including a forecast statutory net profit of $240 million to $250 million after currency headwinds are taken into account.

Developed market unit sales are expected to continue growing, with emerging market volume improving thanks to the Chinese tender. Research & Development (R&D) expenditure is expected to be around $160 million to $170 million, compared to $150 million in 2017.

Despite the lower reported earnings, Cochlear increased its dividend 8%, from $1.30 to $1.40 per share. Basic earnings per share were $1.93, pricing Cochlear at more than 40x estimated full year earnings. Using Cochlear’s $240 million profit forecast, the company is currently trading at around 40x full year earnings – a lofty price even for a great business like Cochlear. I like Cochlear a lot, but I think it is fully priced and I’m not a buyer at today’s prices.

The Disruptors: 3 Revolutionary Aussie Companies to Back for 2018

We're living in one of the most exciting times in investing history. Innovation and a booming culture of entrepreneurship are constantly creating new companies with the potential to make forward-thinking investors very rich. Now more than ever, one small, smart investment could make a huge difference to your wealth.

That's why at The Motley Fool we've been scrutinizing the ASX to uncover the kinds of companies that we believe could turn into the next Cochlear or REA Group.

We've found three exciting companies that we believe re poised to perform in the new year. Click here to uncover these ideas!

Motley Fool contributor Sean O'Neill has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Cochlear Ltd. 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.