Cochlear Limited (ASX:COH) is a manufacturer and distributor of cochlear implantable devices for the hearing impaired. With direct operations in more than 20 countries, Cochlear Limited ‘Cochlear’ distributes its products in the Americas, Asia Pacific, Europe, the Middle East and Africa.
Cochlear offers the following three main products:
- Cochlear Nucleus 5 which is a hearing implant that helps people with moderate to profound hearing loss in both ears.
- Baha which is a bone conduction implant that can help people with single-sided deafness and certain types of mixed hearing loss.
- Hybrid which is an electroacoustic implant that can help people with high frequency hearing loss.
Cochlear provide the gift of hearing to people young and old.
Does this business have a sustainable competitive advantage?
- Cochlear is the global market leader in implantable hearing technology.
- Cochlear has a reputation of delivering the most reliable and safest implantable devices, despite voluntarily recalling one of their own products in September 2011.
- Cochlear maintains strong brand awareness with healthcare professionals and hearing specialists.
- Cochlear invest about 13% of revenue each year on technological innovation in order to stay ahead of the competition.
- Cochlear enjoys a strong international distribution base for their products.
- Cochlear is building the business to handle more growth by investing in marketing and sales resources.
- Cochlear reports significant unmet clinical need for their products due to growth from emerging markets.
What are the risks facing this business?
The biggest risk to Cochlear is that which it has recently faced. Cochlear voluntarily recalled their Nucleus CI 500 implant in September 2011. The manner in which the company handled the recall was first class. Cochlear worked tirelessly to find the fault with product. The company communicated openly and regularly about the recall with healthcare professionals and implant recipients. The product recall cost Cochlear in the vicinity of $100 million. While their actions have helped maintain their reputation, the risk is that a future product recall will have a more damaging long term impact on the reputation of the company.
One of the other risks facing Cochlear is the potential obsolescence of their technology. The company puts a lot of effort into research and development. Cochlear re-invests about 13% of its revenue each year into technological innovation to stay ahead of the competition.
Is it run by able and trustworthy management?
Cochlear is run by a very experienced and trustworthy management team. The actions taken by management in the difficult time faced with their product recall demonstrate their capability and long term commitment to the company. Management acted decisively and communicated clearly with implant recipients, healthcare professionals, their staff and shareholders alike.
In 2010, Cochlear moved into a purpose built 24,000m² head office facility situated at Macquarie University. This facility is designed to house their specialist research and manufacturing functions. The company has a 25 year expansion plan for the site and plans to create a world leading hearing precinct.
Cochlear’s management do not provide guidance of their earnings for the next quarter or half year. Instead management prefer to focus on where the company will be in five years time not next quarter. This is great message which reinforces the longevity of the business. This message is consistent with their long term plans at the company’s purpose built facility.
Is it trading at a bargain price?
Cochlear rarely trades at a bargain price.
|Company||Code||Rank||2010 Actual Valuation||2011 Actual Valuation||Today’s Share Price||Margin of Safety||2012 Forecast Valuation||2013 Forecast Valuation||2014 Forecast Valuation|
|Cochlear Limited||COH||Gold 1||$49.89||$50.18||$64.35||-54.76%||$41.58||$43.49||$49.73|
In summary, Cochlear is a highly profitable business with positive cash flow and experienced management. Cochlear has no net debt and is still the market leader in the field despite the product recall faced by the company this financial year. I do hope to be a shareholder in Cochlear one day however, the elevated share price this company trades at may never give me the opportunity to invest in the company with a sufficient margin of safety.
This article is published by Dean Mico.
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