Cochlear Limited (ASX: COH) shares were down 4% today following their Annual General Meeting (AGM). Is it time to buy shares?
About Cochlear
Cochlear is one of the world’s leading medical businesses. Cochlear designs, manufactures and supplies the Nucleus cochlear implant, the Hybrid electro-acoustic implant, and the Baha bone conduction implant.
Graeme Clark invented the device, which was first implanted in recipient Graham Carrick, aged 37 years, in 1982. Some of the most recent modifications allow users to play sound from their phone directly into their implant.
Cochlear’s AGM
Chairman Rick Holliday-Smith opened today’s meeting stating FY19 was a busy year for Cochlear. The company focussed on building awareness and market access to cochlear implants, expanding marketing activities and customer servicing capability, while maintaining a commitment to product innovation through investment in research and development (R&D).
FY19 result
Holliday-Smith then briefly discussed their FY19 result, which showed a net profit of $276 million — an increase of 13% from FY18, although this included a $10 million gain from an asset revaluation. Sales revenue increased by 7% to $1.45 billion, or 2% in constant currency terms.
Dividends
For those investors who like dividends, you will be pleased that the company’s current dividend policy has been maintained with the objective to pay around 70% of net profit as dividends. However, the dividend policy is reviewed annually.
Long term incentive (LTI) plan
There were changes to Cochlear’s long-term incentive plan which may have spooked some investors. They are proposing to extend the length of the plan from three to four years, as well as recalibrating the earnings per share (EPS) targets. The EPS targets are shifting from 10% to 20% compound annual growth over three years to 7.5% to 12.5% over four years.
FY20 outlook
The Chairman then reconfirmed Cochlear’s FY20 outlook, previously provided at their FY19 result, which was for net profit to be in the range of $290-300 million. That’s a 9-13% increase on FY19. Growth is expected to broadly continue across the business in FY20, underpinned by the continuing investments made in product development and market growth initiatives over the previous few years.
He also said they have made, “sound progress in the development of our new manufacturing facility in China, which is running to schedule” and expect to complete this stage by mid-2020.
Are Cochlear Shares A Buy?
I consider Cochlear to be a very high quality company, alongside the likes of CSL Limited (ASX: CSL)
and ResMed Inc (ASX: RMD).
If the company can achieve the midpoint of their guidance, a profit of $295 million, the shares currently trade at a PE ratio of 40 times. While that may seem a little high, Cochlear remains a high quality business, with low net debt of $100 million and expected profit growth of 9% to 13%.
If the change to the long term incentive plan has too spooked you, you may prefer to consider one of the high growth shares in the free report below.
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At the time of writing David owns shares in CSL and Resmed.
