One of the best performers on the ASX this year has been the Cochlear Limited (ASX: COH) share price.
On Friday the hearing solutions company had a strong finish to the week and rose over 3.5% to a new all-time high of $204.56.
This latest gain means that Cochlear's shares have now risen over 19% since the turn of the year and a whopping 35% over the last 12 months.
Is it too late to buy shares?
I estimate that Cochlear's shares are changing hands at approximately 46x full-year earnings and 40x FY 2019 earnings.
While this is of course a significant premium to the market average, I think it is about fair value for its shares based on the company's growth profile.
Furthermore, due to the way the company and industry peer CSL Limited (ASX: CSL) account for their research and development costs, the market has always been happy to pay a premium to own its shares. If you adjust for R&D, which was 13% of Cochlear's sales in the first half of FY 2018, the earnings multiple is a little more reasonable.
But why pay a premium for its shares?
I think there are few shares on the Australian share market that are poised to benefit as greatly from ageing populations around the world as Cochlear. As people age, their hearing will invariably fade and failing to deal with this can lead to the feeling of isolation and then depression.
I expect Cochlear to take advantage of this strong and growing demand thanks to its global distribution network, allowing it to deliver above-average earnings for at least the next decade.
In addition to this, with many expecting rates to be on hold in Australia long into 2019 and the Federal Reserve raising rates periodically in the United States, I believe the Australian dollar could weaken considerably over the next 18 months.
In the first-half of FY 2018 approximately 84% of its $639.6 million revenue was generated in the Americas and EMEA regions. Favourable currency movements could give its earnings a meaningful boost.
But there are risks of course. Trading at such a premium does leave the company exposed to downside risk if it fails to live up to expectations. However, I remain confident Cochlear is more than capable of beating the market's ~11% earnings growth expectations in FY 2018.
