2 stocks in the sell zone – Cochlear Ltd and CSR Ltd

Cochlear Ltd

COH Details
Currency headwinds: Cochlear (ASX: COH) reported NPAT growth of 18% to $224 million for the year ended 30 June 2017 while revenue from ordinary activities were $1,239.73 million up 7% from last year. Group’s diluted EPS was 270 cents compared to 230 cents of FY16 while final dividend declared was 140 cents. The group’s services revenue has grown from about 1% to over 25% of total revenue over 15 years with support from the growing recipient base.

For FY18, the group expects reported net profit to increase to $240-250 million, with currency headwinds moderating strong underlying business growth. The group’s currency exposures are hedged to some degree in the shorter term. On the other hand, Nucleus® 7 Sound Processor’s full market release is expected to boost implant growth.

COH shares have been up 24% in last six months (as at November 09, 2017) but were edging slightly lower in last few days. The hearing device maker’s valuation now looks at higher levels in comparison to peers like ResMed and Ramsay Health Care. Particularly, Cochlear is trading on price to earnings of over 40 times consensus for the next twelve months. While the group is one health care company with world-class product portfolio, the valuation is quite high. There are also risks related to any unfavourable decision with regards to patent lawsuits. Given the trading scenario, we put a “Sell” recommendation at the current price of $179.19


COH Daily Chart (Source: Thomson Reuters)
 

CSR Ltd

CSR Details
Better property earnings: CSR (ASX: CSR) had witnessed a 32% increase in NPAT (before significant items) to $136.6 million for the half year ended 30 September 2017 while building products delivered gains and property earnings were witnessed to be better.
 

Property Earnings (Source: Company Reports)
 
The building products’ earnings before interest and tax (EBIT) surged 5% on the previous half year to a record $120.3 million. Healthy market conditions for residential housing on the east coast of Australia helped the rise in prices and volumes. Aluminium was also higher with EBIT rise of 27% at the back of higher realised prices. On the other hand, Viridian has been a drag with work underway to drive operational efficiencies while delay in initiatives is expected to have value not realised until the year ending 31 March 2019. The Glass segment has particularly experienced reduced earnings owing to slower than expected growth in the Commercial and Design Glass business. Further, the new residential construction downturn is expected to stay and may impact profit profile from this point. We give a “Sell” recommendation at the current price of $4.39


CSR Daily Chart (Source: Thomson Reuters)

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