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Mid-Cap

Cochlear Limited and ResMed Inc. - Are these in good health to Buy?

October 07, 2015 | Team Kalkine
Cochlear Limited and ResMed Inc. - Are these in good health to Buy?

Cochlear Limited (ASX: COH)


 
The company is a global leader in implantable hearing devices including cochlear implants, bone conduction implants and acoustic implants. The company believes that there remains a large unmet clinical need for treating severe to profound hearing loss. It has more than 2800 employees and has direct operations in more than 20 countries with its products being sold in over 100 countries.
 
Overview of FY 2015
 
The momentum in sales continues to be supported by the expansion of online services and other services supporting a range of innovative products such as true wireless, sound processors and implants. Cochlear implant sales were up by 15% to $ 826.8 million as were bone conduction/acoustic implant sales to $ 115.1 million making for total sales revenues of $ 941.9 million up by 15% over the previous year. EBIT was up by 38% to $ 206.4 million and net profit after tax was up 56% to $ 145.8 million. The EPS was up 56% to 256.1 cents per share. The company had record sales and, in constant currency terms (FY 2014 figures stated at FY 2015 exchange rates), the growth over the previous year would work out to 10%. The sales momentum continues and the sales for the second half of FY 2015 are estimated at $ 501.4 million. Cochlear implant sound processors upgrade sales are up by 50% to $ 102.1 million and 45% in constant currency terms.


FY15 Performance (Source: Company Reports)
 
Cochlear implant unit sales were a record at 26,838 up by 3% and second half unit sales at 15,149 were up 6% on the same period of the previous year and 30% on the first half. There was continued growth of 15% in the US and 7% in Western Europe. FDA approval was received in June for Nucleus profile with Slim Straight Electrode. Bone conduction/acoustic implant sales were up 15% to $ 115.1 million (9% in constant currency terms) and the Baha 5 Sound Processor was released in the June quarter. The Baba Attract transcutaneous system accounted for 35% of all new Baha recipients who now total more than 120,000. The EMEA area accounted for 40% of sales with a constant currency growth of 6%, the Americas for 43% with 15% and Asia Pacific for 17% with 9%.



Region-wise growth (Source: Company Reports)
 
The COGS in the second half of FY 2015 was 29.5% of sales compared to 28.1% for the same period in the previous year. The inventory provision was increased by $ 7.8 million most of which related to older generation sound processors. The operating margin was 22.3% compared to 18.6% and the R&D spending of $ 128 million grew by 1% in constant currency terms and accounted for 13.8% of total revenues. The full year dividend was 254 cents per share fully franked which is was up by 25% over the previous year.
 
Despite the fact that the company is an industry leader globally and that a substantial part of sales stand to benefit from the depreciating AUD, we believe that the share is expensive at the current price levels and do not recommend an investment at the moment.


COH Daily Chart (Source: Thomson Reuters)
 

ResMed Inc.


 
With more than 4000 employees and a presence in more than 100 countries, the company is a pioneer in new and innovative devices for sleep disordered breathing, chronic obstructive pulmonary disease and other chronic diseases for more than 25 years. The world leading products and innovative solutions improve the quality of life for millions of patients worldwide, reduce the impact of chronic diseases and save on health care costs.
 
For the quarter ended 30 June 2015, the company announced a 9% increase (17% in constant currency terms) in revenues to $ 453.1 million and net income was $ 87.5 million in line with the previous period. Diluted EPS was 61 cents per share also consistent with the same period of the previous year. The results were impacted by 2 nonrecurring items namely expenses of $ 5 million ($ 3.5 million net of tax) associated with the field safety notice in response to the SERVE-HF clinical trials and donations of $ 6 million ($ 3.6 million net of tax) made up of a donation of $ 5 million to the University of California San Diego and $ 1 million to the ResMed foundation. Non-GAAP net income for the quarter was $ 96.4 million, a 3% increase over the previous period. Non-GAAP diluted earnings per share was $ 0.68 which was a 3% increase.
 
For the quarter, revenues in the Americas was 27% up at $ 273.7 million and in combined Europe and Asia-Pacific 10% down at $ 179.4 million though the latter figure was 5% up in constant currency terms. Including the one-off expense of $ 5 million relating to the field safety notice, gross margin was 57.3% and excluding the one-off expenses was 58.4% lower than the same period of the previous year mainly because of foreign currency rate movements, an unfavourable geographical mix and decline in average selling prices. Research and development expenses for the quarter were $ 28.5 million or 6.3% of revenues and decreased by 10% (5% on a constant currency basis) compared to the previous period. Operating profit was $ 99.5 million and cash flow from operations was $ 99.6 million.


FY2015 Results (Source: Company Reports)
 
For the fiscal year 2015, revenue was up 8% to $ 1.7 billion (13% on a constant currency basis) and net income was up 2% to $ 352.9 million. Diluted EPS was up 3% to $ 2.47 per share and non-GAAP earnings per share were up 4% to $ 2.57 per share. The Board of Directors declared a dividend of 30 cents per share which is an increase of 7% over the previous dividend.
 
We have no doubt that the company will benefit from the ongoing expenditure on health care costs globally, an ageing population and the strengthening global economy. Recently, RMD also disclosed about insider transaction entailing the information that Peter C Farrell, the Chairman of the Board sold 27,169 shares on Oct 1, 2015. The company is set to announce its first quarter results for FY16 in October 2015. However, when you consider the forecast dividend yield of about 2% and the current stock price, the share looks expensive and we recommend against making an investment at this time and at this price of $7.36.


RMD Daily Chart (Source: Thomson Reuters)

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