Australia | Jun 13 2012
– Data suggest Cochlear losing market share
– Deutsche Bank trims forecasts and price target as a result
– Broker downgrades to a Sell rating
– Share price outperformance unlikely given market share concerns
By Chris Shaw
For the past several months Cochlear ((COH)) has appeared to handle the recall of its N5 implant well, though there has been some related loss of market share as the company's aura of superior safety and reliability has been tarnished.
In the view of Deutsche Bank, this loss of market share is likely to continue, as while Cochlear will focus on re-launching the N5 device, competitors will continue moving closer to bringing new devices to the market.
Recent market data support this view, Deutsche noting a survey of 90 respondents from implant centres in the US and Europe shows Cochlear is losing some market share. Western world unit sales grow is around 10%, but Deutsche's survey suggests Cochlear's market share in the Western world has fallen to 61% this year from 68% in 2010. Advanced Bionics is believed to have picked up most of the share lost by Cochlear.
Respondents to the survey expect Cochlear's market share will decline to around 54% over the next three years. To account for this, Deutsche has lowered earnings per share (EPS) forecasts for Cochlear by around 7% in each year through FY14.
The changes leave Deutsche forecasting EPS for Cochlear of 269c this year and 267c in FY13 (implying no growth). This compares to consensus EPS forecasts according to the FNArena database of 282c and 298.2c respectively.
The changes to Deutsche's estimates see the broker cut its price target to $56.00 from $59.00. In line with its below consensus forecasts, Deutsche's revised target is below the consensus target in the database of $60.77. Targets range from Citi at $50.86 to Macquarie at $68.50.
Given its market share concerns, Deutsche has downgraded Cochlear to a Sell rating from Hold previously. This reflects the view share price outperformance is unlikely given Cochlear's potential market share issues.
The FNArena database now shows only Macquarie still rates Cochlear as a Buy, against three Hold and four Sell recommendations. For Macquarie the expectation is market share losses for Cochlear will be well below what the market expects, which implies continued share price upside from current levels.
The Hold argument is largely a valuation call, as the three brokers with this rating – RBS Australia, Credit Suisse and JP Morgan – have price targets broadly in line with the current share price of Cochlear.
Those with a Sell recommendation include UBS, which sides with Deutsche's view there remains downside risk to underlying unit sales growth data. For UBS, this risk is not supportive of the current Cochlear share price. Citi agrees, also noting Cochlear has been losing market share to competitors in recent months.
Shares in Cochlear closed yesterday at $64.64, which compares to a range over the past year of $45.11 to $77.50. Yesterday's closing share price implies downside of around 6% relative to the consensus price target in the FNArena database.
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