Cochlear guidance disappoints
Recommendation
At its recent AGM, Cochlear provided guidance for a 2014 net profit roughly in line with 2013 'with a heavy bias to the second half', blaming the sharp reduction in currency hedging revenues combined with its decision to maintain expenditure on growth initiatives, particularly research and development.
We’re pleased to see it keeping up R&D spend, but the guidance itself is disappointing. However, it needs to be remembered that 2013 had the benefit of $38m of foreign exchange gains whereas, at current rates, 2014 would see foreign exchange losses of $5-10m. So growth in operational revenues is expected to pick up the difference – but then so it should, as it has the translational benefit from the lower Australian dollar.
The company was keen to talk about the recent fruits of its R&D expenditure, including the recent launch of a new Baha (bone-anchored hearing aid) device that promises reduced surgery and healing times, and pre-market approval for a hybrid implant system which will help implant recipients make use of their residual hearing. But the key determinant of Cochlear’s success over the next few years will be the recently launched Nucleus 6 processor and we’ll have to wait a bit longer to see how that’s travelling.
Based on the guidance, earnings per share for 2014 should be around $2.32 (although the underlying level excluding hedging losses would be more like $2.45 at current exchange rates). With the stock down 3% since Cochlear: Result 2013 on 7 Aug 13 (Hold – $59.74), that implies a prospective price-earnings ratio of about 25 (or about 24 excluding the hedging losses), but the hope is that upgrade sales for the Nucleus 6 will bring this down sharply in 2015. We’re happy to maintain our $55 Buy price, but are notching down our rather optimistic looking $90 Sell price to $80. HOLD.
Note: Our Growth Portfolio owns shares in Cochlear.