Chinese Upside To Cochlear’s Numbers?

This story features COCHLEAR LIMITED. For more info SHARE ANALYSIS: COH

The company is included in ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

Cochlear ((COH)) is already expected to deliver strong earnings growth in coming years, broker UBS forecasting EPS of 246c this year, 289c in FY10 and 328c in FY11, which compares to the 216c the company recorded in FY08 and what the broker notes are consensus forecasts of 239c this year and 270c in FY10.

Earnings risk according to the broker remains to the upside as there is scope for the company to lift orders into China via two options. The first is an implant donation program, where shippage of units is likely to re-start in the current quarter via a fresh order after no sales were recorded under the program in FY09. 

In addition, the broker notes the Chinese government has started up its own implant program, setting aside 50 million yuan for the purchase of implants. While margins to supply such an order are likely to be very low the broker sees scope for the winning bidder to receive an order for 300-400 units, while the next in line should get an order for 150-200 units.

If Cochlear were to win either of these orders this would offer further upside to UBS’s current forecasts. The other positive piece of news on the stock according to the broker is its new Nucleus 5 implant system is receiving very good reviews in trials given it is lighter, thinner and smaller than current alternatives. This suggests a positive market reaction when the product is officially released.

Adding all this up, the broker sees the stock as still worthy of a Buy as the strong earnings growth expected is enough to justify a solid share price premium. This is reflected in the broker’s price target of $62.80, well above the average price target according to the FNArena database of $54.97.

Where others are not so positive is on volume growth in implants, RBS Australia recently lowering its earnings estimates slightly following an update on earnings guidance from management to reflect what it viewed as slightly disappointing numbers.

Deutsche Bank did the same thing and expects another so-so year in FY10 as the global financial crisis impacts on volumes and as the company is unlikely to receive as big a boost from foreign exchange movements in the coming year as it did in FY09. Both Deutsche and RBS rate the stock as Hold, with targets of $52.00 and $51.00 respectively.

Bank of America Merrill Lynch is even more negative with its Underperform recommendation, the broker arguing the lower volumes are reflecting slower industry growth that may not be offset unless the company quickly wins additional market share once its Nucleus 5 model is released. In the meantime the stock’s P/E ratio of around 20x is simply not justified on the earnings outlook in the broker’s view.

Overall the FNArena database shows the stock is rated as Buy once, Accumulate once, Hold five times and Sell twice, Credit Suisse being the other broker with a Sell rating.

Shares in Cochlear today are stronger in line with the broader market and as at 10.55am the stock was up $1.27 or 2.3% at $56.00. This compares to a range over the past year of $43.11 to $60.99.

Click to view our Glossary of Financial Terms