This morning Cochlear Ltd (ASX: COH) reported its half-year results for the period ending December 31 2018. Below is a summary of the results with comparisons to the prior corresponding half.
- Sales revenue of $711.9 million, up 11%, or 6% on constant currency (CC) basis
- Earnings before interest and tax $177 million, up 11%
- Net profit of $128.6 million up 16% on CC, or up 11% adjusted for tax impact in H1 FY18
- Earnings per share (EPS) of $2.23 up 16%
- Interim dividend of $1.55 up 11% on payout ratio of 70%
- Total implants up 5%
- Implant business grew revenue 5% to $413.9 million (0% on CC)
- Services business grew revenue by 28% to $207.2 million (21% on CC)
- Still disputing US$268 million damages awarded against it for IP breaches in US courts
- Net debt reduced to $72.7 million from $86.2 million
- Guidance maintained for full year net profit between $265 million to $275 million
This is a slightly mixed result from what is one of the best growth businesses on the local market, with the the growing strength of Cochlear's services business offset by flat implant sales growth across the company's major North American and Western European markets.
However, on the bright side implant sales in emerging markets grew 15%, with the company flagging Japan, Taiwan and China as strong new growth markets.
The services business benefited from the popularity of the Nucleus N7 Sound Processor that is iPhone and Android compatible for users. The business is often flagged as a great new high-margin growth opportunity for Cochlear thanks to its high margins and recurring revenue streams. Already it contributes 29% of total sales.
Outlook
At $194 the stock trades on 41x analysts' estimates for full year earnings per share of $4.72, which is expensive despite the all round strength of the business. It should also be noted that meeting these estimates could be a push based on its most recent financials.
It's also possible the group is facing a big final legal bill in the U.S. courts, although this remains a known unknown given the complexity of the legal proceedings.
Over the medium term Cochlear expects to complete construction of its Chinese manufacturing facility by the end of FY 2020, with the group still investing around 12% of revenue or $170 million per year in research and development to bring new products to market.
As such Cochlear ticks all the boxes for investors except valuation, and I'd rate the stock a hold for now.
Other high-quality healthcare companies on the local market I'd prefer right now on valuation grounds are ResMed Inc. (ASX: RMD) and CSL Limited (ASX: CSL).
