ResMed rising as Cochlear faces pressure

The two medical device manufacturers are on divergent paths.

Once both market darlings, ResMed (RMD) and Cochlear (COH) appear to be on divergent performance paths.

ResMed shares soared late last week after the sleep and breathing disorder device manufacturer unveiled an 11% lift in fourth-quarter revenue despite challenging market conditions.

Hearing device manufacturer Cochlear, by contrast, is expected to come under pressure ahead of its full-year earnings release tomorrow after a series of technical and regulatory problems resulting in product recalls for its Nucleus 5 product.

Under pressure from a Chinese rival, the company’s latest device Nucleus 6 has attracted strong forward orders that will only deliver revenue in the year ahead.

Cochlear is trading on a rather heroic price multiple of 25 times its 2013 earnings and 23 times this year’s forecast profit and, given its lofty pricing, is almost universally recommended as a sell.

Its pricing has been supported by a relatively attractive dividend of 4.3% but its ability to maintain that kind of payout given the difficulties of the past year remains under a cloud.

Resmed, by contrast, is in the ascendancy. On Friday it posted its 74th consecutive quarter of revenue growth while earnings outstripped consensus estimates by around 15%.

Its margins also expanded and with around 95% of its earnings offshore, it stands to be a major beneficiary of a weakening Australian dollar (see Shane Oliver's Time to go global).

Its European division performed far better than expected particularly in Germany which had been considered a problem.

While it is stratospheric pricing – at 24.2 times 2013 earnings - is similar to Cochlear, it is the growth potential that marks the difference between the pair.

Cochlear easily beats ResMed as a dividend play, with ResMed delivering a yield of just 1.4%.

In an interesting twist given the obsession with yield, when it comes to medical devices it appears investors prefer growth.

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