Cochlear

Cochlear has warned that net underlying profit, before recall costs, will fall about 15% to $130m-$135m in the year to June. The result implies the company will make only $55m in the current half, compared to $78m in both the previous two halves, before product recall costs. You have to go back to 2007 to find a half where it made less.

It looks like the concerns we voiced at the time of the interim result, on 6 Feb 13 (Hold – $70.00) have manifested themselves, with the company losing market share in the US.

There was, however, some good news in the announcement, which is that the company’s new Nucleus 6 sound processor has launched in Canada and Korea. Approval is expected in Europe ‘imminently’ and in the US by the end of this calendar year.

The Nucleus 6 looks like a big step forward, with the industry’s only inbuilt ‘scene classifier’, which automatically detects the sound environment and adjusts the processing to suit it best.

Until the Nucleus 5 implant is back on the market, the new processor will have to work with the old Freedom implant, but this emphasizes Cochlear’s strength in backwards compatibility. A lower Australian dollar would also help boost profits in future periods.

The new guidance implies full-year earnings per share of about $2.33, 17% below consensus expectations of about $2.78. With the stock down 12% today and 19% since 6 Feb 13, that amounts to a price-earnings ratio of about 24. That’s still too steep for a Buy, but we’re getting closer. Well below $55.00 we'd look to upgrade. The portfolio limit is also increasing to 7% in line with our new portfolio limit process. HOLD.

Note: Our Growth Portfolio owns shares in Cochlear.