What this moat upgrade means for investors

-- | 16/01/2018

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Glenn Freeman: Cochlear is a successful hearing aid implant manufacturer and distributor. Morningstar Analyst, Chris Kallos, recently put out a special report explaining why he has increased his moat rating for the company from narrow to wide and also the valuations for the business going forward.

Chris, thanks for your time today.

Chris Kallos: Thanks, Glenn.

Freeman: Late last year you increased your moat rating on this company from narrow to wide. Can you just talk about some of the reasons for this?

Kallos: A couple of reasons there. Obviously, the company has been innovative leader for many years. We've noticed in the last couple of years there's been a greater emphasis – in fact, a shift in strategy towards greater patient engagement. And what that means is that there is a direct link between the company and the end recipient, and we think that's positive for its moat standing and really increases the service revenue potential over the long term.

Freeman: And Chris, in the special report that you've put together on this, you speak about the share price valuation being quite high for this company. How and when can investors get access to this stock at a reasonable level?

Kallos: Well, unless they have another recall, it would be very difficult to buy Cochlear at a discount to what, we think, it would be worth. Yes, it is running a little bit ahead of near-term fundamentals. At the current share price, we think it implies a five-year revenue growth outlook of about 13 per cent annualised. We think that's more likely around 11 per cent. So, it's marginally above our expectations. But I think for the long-term, it's obviously a very attractive company and stock.

Freeman: And you also talk about Cochlear being a business that's managed to bridge the gap between science and commercial reality. How have they done that?

Kallos: Well, it was the first company to commercialize the prosthetic device. So, it effectively took what was effectively a scientific experiment back in the 60s and 70s into commercial reality in the 80s. That's a unique position for any company, for any branding of a company and that underpins obviously a very strong branding position for Cochlear.

Freeman: And lastly, as a company that does have an international focus, are currency movements particularly material for Cochlear?

Kallos: Well, currency generally is important to the extent that it can create volatility in a company's revenue. However, Cochlear has got a very well-established hedging strategy in place. We don't think that volatility is necessarily a problem for Cochlear. But to the extent that currencies move around, that is something that investors have to factor in.

Freeman: Thanks for your time today, Chris.

Kallos: Thanks, Glenn.

Freeman: I'm Glenn Freeman for Morningstar. Thanks for watching.

This report appeared on www.morningstar.com.au 2021 Morningstar Australasia Pty Limited

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