Cochlear

Yesterday’s 16% share price rise for Cochlear shows just how desperately investors love this stock. But the wild enthusiasm seems misplaced, even though the announcement contained several snippets of good news relating to the recall of the Nucleus 5.

The first is that Cochlear believes it has identified the problem with the manufacturing process; variations in a process called ‘brazing’ allow tiny cracks to develop at a later stage. But identification is only the first step in returning the device to market: Cochlear must now thoroughly test its manufacturing processes, conduct clinical trials, then wait for approval from regulatory authorities. If all goes well, it could be a year before the Nucleus 5 goes back on sale in the crucial US market.

Perhaps what investors latched on to was this sentence: ‘There were fewer reported failures in November 2011 than in October 2011’. Nevertheless, the total failure rate is now at 1.9%, up from around 1% in October. This represents close to 500 people who will need surgery to replace their implants.

This recall remains potentially more serious than the market believes. And we still have the impression that Cochlear is trying to highlight the positives rather than telling the full story.

The stock has now risen 10% since Cocky Cochlear boosts payout on 21 Oct 11 (Hold – $56.97). Given the risks relating to the recall, and that the stock looks fairly expensive on a relative basis, it’s now further away from an upgrade. HOLD.

The model Growth portfolio owns shares in Cochlear.