Cochlear Limited (ASX: COH) is a company which provides investors access to a large capitalisation business in the healthcare sector of the S&P/ASX 200 (INDEXASX: XJO) index.
As the company puts it, “Cochlear is dedicated to helping people hear and be heard”. For over 30 years the company has been innovating and developing implants for the hearing impaired. The company aims to bring lifetime value to customers and shareholders by: providing high quality products; providing a continuous service-oriented experience; and by utilising customer information systems to match customer preferences and needs.
For the half to 31 December 2018, Cochlear posted 11% revenue growth to $711.9 million. Net profit was up 16% to $128.6 million. On constant currency terms, revenue and net profit were up 6% and 16%, respectively. The company currently trades on a price-to-earnings (P/E) ratio of 45x earnings, with a dividend yield of 1.57% (or 2.2% grossed up).
In previous articles, I’ve mentioned that consistent investment in research and development is a positive sign for future growth. Cochlear is another company which is investing in itself, spending 12% of revenue on R&D as of half-year to 31 December 2018. Due to the accounting for these expenses, earnings are reduced. If you adjust for this R&D expenditure, Cochlear trades for a more reasonable earnings multiple.
The big picture
Cochlear’s addressable market is growing. Australia’s population is ageing, and we aren’t the only country experiencing this phenomenon. According to the World Health Organization, by 2050 an estimated 16% of the global population, or 1.5 billion people will be aged 65 or over. This is nearly triple the number of people 65 or older in 2010.
Although it shouldn’t be one of the key considerations when choosing which stocks to invest in, taking a position on the macro environment can often help when you have lots of ideas. This is especially true where a company is either very cyclical or earns the majority of its revenue from one region. Cochlear falls into the latter category, with 49% of revenue derived in the Americas as of half year 31 December 2018. Currency fluctuations will impact on the numbers the company reports, with a weaker Australian dollar improving the figures.
Foolish bottom line
Cochlear is currently expensive, even by its own high valuation standards. This is because the company has a history of outperforming the market and we are 10 years into a bull market. The company’s patents, wide moat, and large addressable markets put it in a strong position to continue winning.
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Motley Fool contributor Proutlb95 has no position in any of the stocks mentioned and expresses his own opinions. 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 Scott Phillips.