Woosh! Cochlear’s share price growth just hit 10,000 per cent

Cochlear (ASX: COH) – the world leader in the profound hearing loss market – is, in our opinion, one of the highest quality companies on the ASX. Since listing in 1995, its share price has grown from $2.50 to around $250. That’s a rise of almost 10,000 per cent! This meteoric rise reflects the company’s ability to deliver consistent double-digit revenue and earnings growth each year. And with its market still significantly underpenetrated, we believe there are many more good years to come.

Cochlear has been an overweight position in Australian Eagle’s institutional portfolios since inception in February 2005. Since then, we’ve seen Cochlear’s share price increase from $28 to over $250. Despite the share price increasing over eight times, we remain overweight and believe significant upside remains over the long term.

It is commonly acknowledged in investor circles that Cochlear is an extremely high-quality company and we believe, its quality is still improving. 

Inherent in Cochlear are all aspects of a ‘dream company’. By that, we mean it operates in a growing market, has strong competitive advantages, a solid and conservative balance sheet, and is run by responsible and capable management that cares for minority shareholders.

Cochlear is the market leader in the profound hearing loss market, with over 60 per cent market share. The company has achieved this through its unwavering commitment to product innovation. The company owns thousands of patents, and new patents are filed and approved yearly to maintain their technological advantage over competitors.

Being a market leader is already a good start, but if the market size is significantly underpenetrated, then the runway for growth is immense. The global profound hearing loss market is still less than five per cent penetrated despite Cochlear and its competitors being in business for over 40 years.

Although the management of Cochlear has not been the same for the past 40 years, the behaviour and actions of each management team have been exemplary, showcasing a stable corporate culture that has attracted and developed the right people to be good stewards of capital.

Handling a crisis well remains one of the key criteria we use to judge the trustworthiness of management. An example was how they handled a Cochlear product recall in 2011 which was due to a minor manufacturing fault. Management acted ethically, offered full transparency, and kept the market informed of all actions of the product recall on a weekly basis.

Most recently, in 2021, management was one of the first to reimburse the Government’s JobKeeper payments (an initiative by the Australian Government to support businesses and their employees impacted by the COVID-19 pandemic) after Cochlear recovered from the COVID-19 downturn, saying it was the “right thing to do”, even though there was no obligation for the company to do so.

Despite being a fast-growing company with consistent annual double-digit revenue and earnings growth, Cochlear still manages to distribute over 70 per cent of underlying profit to shareholders. It also spends over $200 million each year on research and development to continuously improve their product and service offering to their life-long customers and stakeholders.

At the most recent results announcement in February 2023, Cochlear reported a return to strong growth in implant sales for both developed and developing markets after a COVID-19-induced downturn. The company has continued to maintain their circa 60 per cent majority market share, research and development is at record levels with a new Nucleus Sound Processor,  to be launched later in the year, and management has maintained a large payout of underlying earnings to shareholders.

Management has also reported their new manufacturing plant in China is currently awaiting approvals and should start production within the next 18 months. This move should fast-track emerging market implant unit growth with the flow-on effect of increased services revenue to follow in the ensuing years.

Cochlear’s runway for growth is still vast despite making significant progress in the last 40 years. With the right people at the helm of a robust company, doing the right things at the right time, we believe that Cochlear can continue to provide world-class products and services to their customers achieve superior returns for shareholders and maintain its position, in our view, as one of the highest quality companies listed on the Australian Stock Exchange.

The Montgomery Small Companies Fund own shares in Cochlear. This article was prepared 17 April 2023 with the information we have today, and our view may change. It does not constitute formal advice or professional investment advice. If you wish to trade Cochlear you should seek financial advice.


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