Broker says the Cochlear share price is in the buy zone following Oticon acquisition

Cochlear shares could be in the buy zone…

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Key points

  • Cochlear shares have been caught up in the market selloff
  • The team at Morgans is likely to see this as a buying opportunity
  • Earlier this week the broker retained its add rating on the company's shares

The Cochlear Limited (ASX: COH) share price has been caught up in the market selloff on Friday.

In afternoon trade, the hearing solutions company’s shares are down 5% to $217.85.

This means the Cochlear share price is now down 2% since the start of the year.

Is the Cochlear share price in the buy zone?

While the Cochlear share price weakness today is disappointing, one leading broker is likely to see it as a buying opportunity.

According to a note out of Morgans from this earlier week, the broker has retained its add rating and lifted its price target to $244.50.

Based on the current Cochlear share price, this implies potential upside of just over 12% for investors over the next 12 months.

What did the broker say?

Morgans has been looking over Cochlear’s plan to acquire Oticon Medical from Denmark-based healthcare company Demant for $170 million.

Oticon is a cochlear implants and bone conduction hearing solutions provider with 75,000 hearing implant recipients. And while it is a loss-maker at present, Cochlear intends to “determine and implement a plan that returns the business to profitability as quickly as possible.”

Morgans doesn’t appear concerned by its lack of profits and instead is focusing on the boost it could have to its market position in the bone-anchored hearing aid segment. It said:

“We view access to a 75k+ installed base, which COH has agreed to provide ongoing support, and fortifying its position in the bone-anchored hearing aid segment, as the driving force behind the deal, as sound processors/services can be developed to leverage this platform over time.”

Furthermore, the broker feels that Cochlear is getting a good deal and believes the company only has a low hurdle to overcome to generate an adequate return.

“The acquisition is earnings and return dilutive, at least in the near/medium term, but management reiterated its long-term 18% NPM [net profit margin] target, suggesting it believes it can succeed where Demant failed in turning around the business, and at 2.2x, the hurdle looks low to generate an adequate return, in our view.”

All in all, this appears supportive of the broker’s positive view on Cochlear’s earnings profile. Morgans concludes:

“While we continue to believe a full recovery from COVID-based disruptions still has time to play out, improving demand and strong pipeline, coupled with management’s increasing confidence, is all suggestive of an improving earnings profile.”

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended Cochlear Ltd. The Motley Fool Australia has recommended Cochlear Ltd. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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