Cochlear (COH) researches, develops and markets cochlear implant systems for hearing impaired individuals.The company currently occupies a ~70% share of the world market for the profoundly hearing impaired (PHI).
COH hearing implant systems include Nucleus and Baha, and are sold in over 100 countries, with direct operations in over 20 countries. With well over 80% of the group’s earnings not denominated in Australian dollars, the company’s bottom line is sensitive to currency translation.
COH’s FY12 results don’t look that impressive at first glance.
Net profit was $56.8 million, down 68% on the prior year’s result.
However, this did include a $101.3 million (post-tax) charge relating to the voluntary product recall of its implanted Nucleus CI500 range after an increase in failures in its Nucleus CI512 implants.
Total revenue over the period was down 4% to $779 million.
However if we look at sales on a constant currency terms they were actually up 1%.
Implant sales for the full year were 23,087 units, which was down 6% on the prior year.
Whilst the fall in implant sales would normally give us some cause for concern, especially given the recall issues, the second half sales showed a 15% improvement on the first half.
As previously mentioned, COH’s earnings are very sensitive to Australian dollar movements given that over 80% of its earnings are sourced overseas. Over the last month the Australian dollar has fallen against most currencies, and against the US dollar it has fallen from a little over $1.06 to $1.02.
Against the euro, the Aussie has fallen from about $0.86 to $0.81. It is well known that there is a strong positive correlation between the Australian dollar and the country’s mining industry.
As such, the recent weakness in the sector is likely to see continued weakness in the Aussie dollar.
The recall appears not to have affected COH’s revenue, at least on a constant currency terms. The company’s long-term position still remains strong, with an aging population likely to support growth for many years to come.
COH’s earnings have always been defensive in nature and we don’t see this changing in the future. As such we believe that the short-term weakness in the Aussie dollar will continue to see COH’s share price to appreciate in the near-term.