Investment Solutions


Investment Solutions


Investment Solutions


3 reasons Cochlear Ltd (ASX:COH) is one of the best companies on the ASX

Owen Raszkiewicz

Wednesday, September 7, 2022

Wednesday, September 7, 2022

Cochlear Ltd (ASX: COH) is a super-high quality company, but every ASX investor knows it. Therefore, valuation of Cochlear shares is a key consideration before buying.

Cochlear Ltd (ASX: COH) is a super-high quality company, but every ASX investor knows it. Therefore, valuation of Cochlear shares is a key consideration before buying.

Cochlear is the world leader in implantable hearing aids. Chances are, you know someone (or know ofsomeone) who has a Cochlear implant.

Cochlear's devices are expensive and sold through audiologists and specialist doctors, with the consultation, surgery and healing process often taking months. Sometimes, private health insurance won't cover the entire cost of the device and surgery (especially if you need two of them), so a critical constraint on Cochlear's growth is this insurance funding bottleneck.

All that said, here are three reasons why I think Cochlear is one of the highest-quality companies on the ASX.

3 reasons Cochlear is one of the highest quality companies on the ASX

1. Healthcare tailwind

As the world ages and becomes more affluent, demand for healthcare services and products is exploding. Globally, according to the World Health Organisation (WHO), healthcare spending rose to US$8.3 trillion as of 2018 and reached 10% of gross domestic product (GDP). That's an enormous amount of money spent on healthcare. Data from the World Bank suggests it is currently around 9.8% of GDP.

This tailwind is a huge opportunity for an industry-leading company like Cochlear and will help it grow sales, even if it doesn't capture more market share.

2. R&D budget. 

One of the most important considerations you will make before screwing an electronic device into your skull will be 'does the company continue to invest in the best technology?'

After all, you, and your healthcare experts, are hardly going to be excited about a company that doesn't support existing devices or look for new ways to improve the device. Let's remind ourselves -- you will have this device screwed into your head and it'll likely stay there for many years!

As you can see in the company's accounts, Cochlear spends between 10% and 15% of its revenue on research and development (R&D) every year. Meaning that it's spending about $210 million per year to improve and expand its range of devices. That type of relentless focus on its customers means it'll be very hard for a competitor to enter the market and take the #1 position.

3. Consistent profitable growth

Source: Selfwealth, September 2022; the maroon line is revenue and the purple/pink line represents net profit. 

As you can see above, Cochlear is not only growing steadily -- it's growing profitably. Over the past 10+ years, Cochlear has reported profits in all but one year -- and that includes a period when there was a massive recall of products.

This profitable and consistent growth speaks to points #1 and #2, above, but also the company's competitive advantage or 'moat'. That is, I think the company has strong defensive qualities that ensure it can continue to make profits.

Buy, Hold or Sell?

Cochlear is one of those companies you love to own, and want to do so at every opportunity. But it's no secret Cochlear is a great business, so the Cochlear share price valuation is almost always stretched. According to analysts surveyed by Refinitiv, Cochlear shares are currently trading around their fair value (~$220). In other words, it's not a bargain.

In my view, investors have two options: bite the bullet and begin slowly build a portfolio position in the company (e.g. a 0.5% portfolio position today, another 0.5% in six months, etc.), hoping prices will fall; or wait until we see a genuinely share price pullback (like what happened in 2020 - when Cochlear fell from $243 to $159 then rapidly bounced back).

In any case, I think Cochlear is one of those companies that deserves a spot on long-term investors' watchlists.



Owen Raszkiewicz is the Founder of Rask, and host of Selfwealth Live. You can follow him on Twitter.

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