The Cochlear limited (ASX: COH) share price has fallen almost 8% in August. This is a positive sign for those of us waiting for an opportunity to buy COH shares. At $202.17 per share (at the time of writing), I still think Cochlear shares are too expensive to buy, however; if the current trend continues, I’m hopeful there might be an opportunity to buy in the not too distant future.
Cochlear has performed extremely well over the past decade. It has averaged a return on equity of more than 35% and has almost doubled its earnings. This has been achieved while maintaining a relatively low amount of debt and while consistently paying out at least 69% of its earnings as dividends.
The company generates 88% of its revenue from the sale of its cochlear implants. These implants are considered to be an industry leading product and are used to treat hearing loss. Cochlear aims to spend 12% of its revenue on R&D, which should help it in maintaining its current position as a market leader.
Is Cochlear a buy?
I expect Cochlear to continue to perform exceptionally well over the long-term. However, this view also appears to be the view of the market with COH shares trading at a price-to-earnings ratio of 46 times.
I believe $170 is a rough estimate of fair value for Cochlear shares at the moment, but there is no way of knowing if the Cochlear share price will ever reach this level. Nevertheless, I would prefer to wait patiently and potentially miss out rather than risk paying too much. Paying a price above fair value could mean weak investor returns, despite owning a highly successful company.
Cochlear is due to release its full-year results tomorrow, so I’ll be watching with interest what impact it has on the share price.
In my view, it is not the right time to buy Cochlear shares, but I would strongly consider investing in the future at a lower price. CSL Limited (ASX: CSL) is another biotech company I would love to own but again, its share price seems overvalued. This means that I will be waiting patiently before investing in the biotech space. I believe waiting for a cheap price is a far better approach than investing simply due to the fear of missing out on short-term gains.
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Mitchell Perry has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd. and CSL Ltd. 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.