The Cochlear Limited (ASX: COH) share price is booking in its third day of gains as the stock bounces from Monday's more than one-year low of $156.03.
The COH share price jumped 2.7% to $167.04 in early trade when the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index is up 0.4%.
Cochlear is leading the healthcare sector higher and is beating its peers including the RESMED/IDR UNRESTR (ASX: RMD) share price, CSL Limited (ASX: CSL) share price and Nanosonics Ltd. (ASX: NAN) share price.
Strong soundings
The hearing implant company is getting a boost from a broker upgrade with Morgan Stanley upping its recommendation on Cochlear to "overweight" from "equal-weight" as it looked it the impact of the acquisition of Sycle.
The broker believes the takeover of Sycle will significantly increase the adoption rate of Cochlear Implants (CI). Sycle is an audiology practice management software used by around 7,000 hearing aid clinics in the US, UK and Canada.
"We estimate current developed market penetration [for CI] at ~5% and capture of annual incidence of severe/profound hearing impairment at only ~7%," said Morgan Stanley.
"Low penetration is explained by weak relationships between hearing aid and CI audiology channels. Sycle will bridge this channel divide and sustain long-term CI market growth."
Valuation upside
The broker estimates that around 100,000 patients a year progress to severe/profound hearing loss that are also customers at Sycle hearing aid clinics but are not referred on to a CI clinic.
This missed opportunity is due to low CI awareness among hearing aid clinics and the Sycle acquisition will give Cochlear a chance to market their solutions to this channel and to turn some of the hearing aid clinics into CI service centres.
Every 5,000 increase in patients adopting CIs will add $15 to the broker's price target on Cochlear of $175 per share.
The stock's close to 30% drop since September also means the stock is trading around 4% above the 10-year average forward price-earnings (P/E) multiple relative to the ASX 200 (excluding financials).
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