The Cochlear Limited (ASX: COH) share price is ending the week with a day deep in the red.
In afternoon trade the hearing solutions company's shares are down 4.5% to $231.30.
Why is the Cochlear share price sinking lower today?
The catalyst for today's decline appears to be a broker note out of Goldman Sachs this morning.
According to the note, the broker has downgraded Cochlear's shares to a sell rating with a $214.00 price target.
This price target implies potential downside of 7.5% over the next 12 months.
Why did Goldman Sachs downgrade Cochlear's shares?
According to the note, Goldman Sachs made the move largely on valuation grounds after a strong share price gain over the last 12 months.
And whilst it is a fan of the company and its competitive position in an attractive market, it appears concerned that its growth could underwhelm over the coming years and fail to justify the premium its shares trade at.
The broker explained: "Whilst it is competitively positioned in a generally attractive market, we have long argued that COH faces a number of challenges in delivering consistently high growth on a base which effectively starts from new each year. In our view, 1H20 provided the clearest evidence yet that the mid/long-term market trajectory is materially slower than current market expectations."
"There are still many reasons to like this stock, but shares have climbed +36% over the last 12m (vs. market +18%) despite mounting evidence that long-debated challenges are coming to bear. We believe COH's EBIT CAGR of 7% (FY19-22E) no longer supports its peak multiple (30x NTM EBITDA, +2SDs above 5yr avg.; +27% vs. sector)," the broker added:
What challenges does Cochlear face?
Goldman Sachs is concerned that the incremental growth opportunity has increasingly shifted from children to adults.
Whilst the volume upside in adults is significantly larger, the broker believes the challenges of reaching the adult segment outweigh the additional penetration upside from that opportunity.
In light of this, it feels delivering consistently high growth on an installed base which effectively starts from new each year is a substantial task.
Goldman Sachs is more positive on Lifestyle Communities Limited (ASX: LIC) and Origin Energy Ltd (ASX: ORG). This week it retained its conviction buy ratings on both of their shares.
