Australia | Aug 11 2011
– Cochlear result in line with consensus
– Sales outcome disappointed some in the market
– Potential for sales to decline if competitor re-enters US market
– Mixed ratings for Cochlear, price targets come down
By Chris Shaw
Consensus forecasts for Cochlear's ((COH)) full year result were for a net profit of $175-$185 million and this expectation was met, earnings of $180.1 million being an increase of 16% on the previous corresponding period.
Breaking down the result, BA Merrill Lynch suggests sales and earnings were in line with what had been expected, with some positive signs with respect to the mix of growth coming from both emerging markets and developed markets. Depreciation, amortisation and tax were all lower than expected.
Macquarie expects strong sales growth for Cochlear to continue for some time, as sales growth in Australia remains healthy and there is upside potential if some scalability suite initiatives can fully address some of the mapping bottlenecks currently in place.
Credit Suisse is also somewhat positive on the sales outlook, as while an expected re-entry by Advanced Bionics will impact this should be offset to some extent by an increased contribution from upgraded sales. As well, margins are expected to improve as R&D expenditure falls in FY12.
UBS also viewed the result favourably, noting during FY11 Cochlear accelerated some costs such as research and development, which had the impact of slowing growth for the year. The hurdle for FY12 has effectively been lowered and as cost growth should slow, UBS has responded to the result by making minor increases to estimates for the coming year.
This is an opposite reaction to that of a disappointed Citi, who saw sales as slightly below forecast, reflecting weakness in the Americas. As a result of the sales disappointment profit fell short of Citi's $193 million estimate, even after a lower than expected tax rate was factored into the numbers.
JP Morgan took a similar view to Citi, suggesting the better than expected result for the full year was due largely to hedge gains outweighing what were generally disappointing revenue numbers.
In Citi's view it was US sales data that was most disappointing given Cochlear's main US competitor, Advanced Bionics, was off the market for the entire period due to a product recall. Citi sees US market growth overall as subdued at present, meaning Cochlear's growth in that market is coming from market share gains only.
This offers some cause for concern according to Citi for if Advanced Bionics regains market share once its recall is lifted, Cochlear's US sales could actually decline. Deutsche Bank agrees, suggesting Cochlear may be entering a period of slowing earnings growth thanks to the combination of slowing sales growth from a maturing product and ongoing forex headwinds.
The timing of a re-entry into the market for Advanced Bionics remains uncertain, UBS noting the market is currently unsure if FDA procedural requirements imply 135 days for re-entry or 180 days. If it turns out to be the latter, Advanced Bionics could be out of the market for the rest of 2011 and UBS estimates this could add better than 5% to market estimates for Cochlear.
Post the result, consensus earnings per share (EPS) forecasts for Cochlear according to the FNArena database stand at 342.9c for FY12 and 368.3c for FY13, against the 315c earned in FY11. With different reactions to the profit result it is not surprising the database shows a range of views on the outlook for Cochlear.
RBS Australia has upgraded to a Buy rating from Hold following the result, the argument being recent share price weakness better captures potential downside risks and reflects more realistic market gains from Advanced Bionics being out of the market.
RBS also expects an ongoing upgrade cycle will support sales for Cochlear, while technology and productivity gains could offset weakness in Baha sales. Citi suggests the weakness in sales for Baha was due to market share losses to the Ponto device of rival Oticon.
For Citi the value argument for Cochlear is lacking, meaning no change in Sell rating. Citi's numbers suggest a 12-month forward earnings multiple of 20 times, increasing to 30 times if forex hedging gains are excluded. Citi sees this as expensive given it forecasts EPS growth in FY12 of just 3%.
Between the RBS and Citi extremes there are six Hold ratings for Cochlear, The argument summed up by Deutsche Bank's view a re-rating is unlikely given potentially slowing sales and ongoing forex headwinds. While BA-ML sees some potential upside catalysts from technological gains and ongoing solid margins, valuation relative to peers prevents a move to a more positive rating than the current Neutral.
Price targets have come down following Cochlear's full year result, the consensus price target according to the FNArena database now standing at $70.35 against $74.46 prior to the result. As UBS notes, much of the fall in target reflects a collapse in reference multiples given recent weakness in global equity markets.
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