Cochlear's earnings point to further problems

Cochlear (COH), the celebrated hearing implant pioneer, has experienced its fair share of disappointments in the past two years.

And it is discovering that rehabilitating a reputation can be a long and difficult road. Its full-year results this morning, with revenue and earnings marginally weaker than its lowered expectations, sparked an early wave of selling.

But it is the future that concerns most.  While the company generally abstains from guidance, the weak second-half sales result and concerns about the rollout of its upgraded device, the Nucleus 6, weighed on investors.

America holds the key to the company’s fortunes. And with the US Food and Drug Administration still to give the final go ahead to the device – following the problems and recall of its previous model – a cloud hangs over sales and earnings for the year ahead.

On top of that, competitive pressure from Chinese and American firms threatens to cut margins and sales.

As an investment, Cochlear should tick all the boxes: a defensive play with a large exposure to foreign and mostly US dollar income, paying a good yield.

The combination of competitive and regulatory issues creates a climate of uncertainty that threaten to overshadow any positive effects of a declining Australian dollar. That explains its lofty stock price premium that, even after all its problems, has seen it trading at 25 times earnings.

In an effort to maintain loyalty among its investors, Cochlear upped its dividend this morning by 2% to $1.27. That was despite a 16% drop in net profit to $132.6 million.

The headline number showed a massive improvement on the previous year. But that was only because last year the company was hit by a $101 million hit to earnings from the cost of its Nucleus 5 recall, an event that rocked the company and which opened the door to its competitors, allowing them to steal a march on ground over which Cochlear once reigned supreme.

The company did well in Europe in 2013. But while US regulators delay final approval for the latest device, the year ahead may well prove as volatile for Cochlear as the reaction on the market this morning.