Australia | Aug 15 2007
By Chris Shaw
Until a few weeks ago the market showed little interest in companies generating reliable and solid earnings growth, favouring instead a riskier approach in buying companies in hot sectors and those with some share price momentum.
The liquidity crisis has changed this and currently everything is being sold off, but at some point the market is likely to settle and with investors assuming a lower risk approach quality stocks with quality earnings should again come to the fore.
According to Macquarie Equities this will bring investor attention back to stocks such as hearing implant manufacturer Cochlear (COH), which it expects will continue to deliver strong solid growth in coming years.
The company has reported core earnings for FY07 of $107.6m, an increase of 24% on the previous corresponding period and slightly ahead of Macquarie’s and the market’s estimates.
The strong result comes on the bank of continued growth in emerging markets, an increase in upgrades in implants and growth in the take-up of bilateral implants, all trends the broker expects will continue.
Impressively the earnings result was achieved in the face of adverse currency movements, UBS pointing out if the currency can settle this year the company should enjoy stronger margins.
On the back of the result management has guided to 15-20% earnings growth in FY08, the broker noting such guidance is historically conservative and this should again prove to be the case in the coming year. One area of upside in its view is China, where momentum is likely to pick up after a relatively slow FY07 performance. The potential of stronger growth in China also sees Merrill Lynch view that market as a source of upside risk to earnings.
Following the result the broker has lifted its earnings estimates slightly, its FY08 earnings per share (EPS) forecast increasing by 3.5% to 235c and in FY09 by 3.6% to 284c, which compares to the 196.5c recorded for FY07.
Others in the market have reacted similarly in adjusting estimates, though as Macquarie notes the changes are not material as consensus forecasts had already factored in a result of $128m next year, which is at the upper end of post result guidance. The major exception is UBS, which is forecasting EPS of 235c in FY08 and 300c in FY09, which compared to pre-result consensus estimates of 227c and 266c.
With earnings expectations being scaled up broker target prices have followed suit, the FNArena database showing an average target now of $67.50 against $65.55 prior to the result. By way of comparison, the pre-result median price target according to Thomson One Analytics was $64.82.
Following the result only Aspect Huntley has changed its rating, upgrading the stock to Buy from Hold. This leaves the stock as rated Buy five times, Hold three times and Sell once, this courtesy of Credit Suisse.
Shares in Cochlear have done well today in a weak overall market as at 12.30pm the stock was down just 2c at $63.23 despite the market falling around 2%.