Cochlear (ASX:COH) is still a long term growth story you should listen to

Cochlear is one of few stocks that has created immense shareholder value and has also greatly improved the lives of its users. Yes, this can be said with respect to many ASX health stocks, but this one can hang its hat on its societal impacts more than most other companies. The stock has seen a 28% gain over the past year and the momentum has continued into CY24 so far on the back of strong earnings growth.

 

Who is Cochlear?

Cochlear (ASX:COH) is an Australian hearing device maker. Its mission is to “Help people hear and be heard, empower people to connect with others and live a full life and help transform the way people understand and treat hearing loss” achieved through innovation and bringing to market a range of implantable hearing solutions that deliver a lifetime of hearing outcomes.

Graeme Clark, the original inventor of Cochlear devices, was a practicing ear, nose and throat surgeon in Australia and the UK. His interest was first prompted because his father was hearing impaired. By 1970, Scots College-educated Clark had started research on research related to the hearing nerves in the human cochlea, or inner ear, and the possibility of electronically stimulating those nerve ends to help deaf people hear. He bought to market a device considering these principles…and the rest is history.

 

More than simple hearing aids

Cochlear is now a company with a market capitalisation of over $20bn and nearly $2bn in annual sales. Its sales were made across 180 countries, resulted in a a 60% global market share and a ~$300m net profit. The company has issued guidance of a $385-400m net profit in FY24, which was an 8% upgrade from the initial $355-375m initially advised in August last year.

It is crucial to note that Cochlear implants are not conventional hearing aids. All hearing aids do is amplify sounds so they can be detected by damaged ears, but this company’s implants bypass damaged portions altogether an directly stimulate the auditory nerve.

 

FY24 and 1HY25 Earnings

Cochlear has 3 main business segments that contribute to its revenue. 59% comes from Cochlear implant systems, 30% from processor upgrades and accessories and 11% from Acoustics Bone conduction systems and sound processor upgrades.

The latest annual result (FY24) saw a 9% jump in units sold – from 44,156 to 48,040. The company’s revenue was $2.26bn, up 15%, its underlying net profit was $386.6m (up 27% and representing a 17% margin) and its statutory profit was $356.8m (up 19%). The company paid dividends of $4.10 per share.

These results were driven by market growth, improved clinical capacity, market share gains and COVID catch-up surgeries. Arguably most important was the successful launch of new products.

Cochlear’s 1HY25 results were not received well. Revenues only increased 5%. This was because although implant revenues increased 12%, services revenue fell by 13%. This was due to fewer people upgrading their hearing devices to the newerst model, Nucleus 8. And so it told investors its net profit for FY25 would be to the lower end of its previous $410-430m guidance.

 

Is there growth left?

We believe that there remains further opportunity for Cochlear to continue its so far successful growth strategy expanding into underpenetrated markets and the launch of its new acoustic implants that is supported by a growing market.

The company has been able to achieve 80% market penetration to its customer base of children in developed markets (130,000 people) leaving little room for growth. However, across adults and senior customers in developed markets the estimated addressable market is over 6million customers which is currently only 3% penetrated.

Analysts have a target price on the stock 10% higher than the current price – $299.33 compared to the $263.63 intraday price on February 14, 2025. They expect 9% revenue growth in each of the next 2 years while expecting 9% profit growth in FY25 and 12% profit growth in FY26. Keep in mind the company isn’t missing its guidance, just it will be in the lower range of what it had anticipated.

 

New products and new markets

There are additional growth opportunities withchildren in emerging markets – there is an an addressable market of over 1.3m that is currently under 10% penetrated. Emerging markets business has been growing readily as awareness of cochlear implants increased and wealth grows across many emerging economies.

We also note that the company’s new products and upgrades to existing ones can help too, including the Osia 2 System, Baha 6 Max Sound Processor and Nucleus 8 Sound Processor – all of which have been upgraded. The new 3 Tesla MRI compatible Osia 2 System was just launched in the US and is expected to be launched across the rest of the world as regulatory approvals are obtained.

 

Finally getting its hands on Oticon

A final important tailwind will be the acquisition competitor Oticon Medical, a deal first announced just under 3 years ago for A$170m.

Oticon Medical was a subsidiary of Danish company Demant that opted to get out of hearing implants, even though it had 75,000 recipients. At the time of the acquisition, Cochlear promised it would get A$75-80m in revenue and that it could eventually reach a net profit margin of 18% in the longer-term.

 

Conclusion

We believe that while the indication that the stock is fairly valued that there remain long term positive growth outlooks in underpenetrated large addressable markets. The delay in getting approval to close to Oticon Medical has been regrettable, but it is not Cochlear’s fault, and we believe the wait could be worth it.

 

What are the Best ASX Stocks to invest in right now?

Check our buy/sell tips