Analysis of Investment Proposition on Cochlear Limited

Cochlear Limited is a biotechnology-based company with listings in the Australian Securities Exchange and global operations in all five continents. CEO Chris Smith heads the company with its board of directors headed by Chairman Rick Holiday-Smith (Cochlear.com. 2016). Cochlear Limited provides hearing solutions through its implantable surgical and non-surgical hearing products. The company has extensive sets of patents and applications numbering over 1000 upon hearing aid and sound processing technology. The company’s major manufacturing base is located in Australia and Sweden while supplies and distribution chains in over 100 countries with its headquarters located in Sydney (Cochlear.com. 2016). The company’s global operations are mainly segmented onto three different sets of geographical areas comprising of Europe, Middle East and Africa (EMEA), Americas (both North America and Latin America) and Asia Pacific. The company generated a revenue of A$ 925 million for th e financial period ended 31.12.2016 (Markets.ft.com. 2016).   The company provides solutions ranging from minimal degree of hearing constraints to sensory-neural hearing loss. Its primary products comprises of cochlear implants, bone conduction implants and acoustic implant solutions. In terms of its products that are to be surgically implanted, Nuclear 6 is of primary significance owing to its ability to restore hear-ability in cases of complete hearing loss in both ears. The Cochlear Hybrid offered by the company provides hearing solutions for people unable to hear high frequency sounds through providing simulations using electronic synapses. The Hybrid processor offered by Cochlear assimilates and synthesizes external sounds and converts them into electrical and acoustics outputs for the patient’s ears.   The company develops the Cochlear Baha by taking into account people with high quantum of conductive hearing loss and one-sided deafness. Baha comprises of titanium hearing aids that are implanted surgically at the back of patientà ¢â‚¬â„¢s ears (Bloomberg.com. 2016). In terms of revenue generation, the company has displayed steady growth over the past four financial periods with reported revenues of A$ 752.72 million for 2012-13, A$ 804.94 million for 2013-14, A$ 925.63 million for 2014-15 (Markets.ft.com. 2016).The revenues for the period 2015-16 was to the tune of A$ 1.13 billion. The revenues generated in the current year displayed a increase of 22.14% over the past year, thereby highlighting efficient sales management and product pricing strategy. The forecasted revenues for the years 2017 and 2018 stands at 1.244 billion and 1.37 billion respectively at the average growth rate of 10.17%. Figure 1: Current and Prospective Revenues of Cochlear Limited The beta of a particular stock showcases the degree of volatility that the stock experiences as compared to prevalent market volatility. A beta that equals 1 displays same degree of risks as experienced by the market whereas a beta that is lower that 1 shows lesser degree of volatility and therefore is less susceptible to financial risks. On the other hand, a beta that is above 1 shows a high degree of volatility coupled with high prospects of returns. Figure 2: Stock price volatility between June 2016 and October 2016 Cochlear limited has a beta of 1.2, which specifies the fact that in case the financial markets raises by a margin of 100, the stocks of Cochlear will rise by 120. This also reiterates the fact that a fall in the market by margin of 100 will result in shares of Cochlear falling by 120 points. For investors that are seeking to earn high degree of returns, Cochlear presents prospective investments. Whereas in case of risk averse investors, including Cochlear in their investment portfolio may result in increasing the levels of portfolio risk The company has a market capitalization of A$ 7.234 billion as of October, 2016 with the total number of shares outstanding at 57.42 million. The company has an Altman Z Score of 2.989, thereby leading to an inference that the company is unlikely to be filing for bankruptcy in the near future based upon financial metrics. It is because an Altman score of 1.8 is considered the threshold below which the probability of filing for bankruptcy increases substantially. Whereas, on the other hand, a corporate entity with Z score of 3 or above has low or negligible probability of going bankrupt or filing for insolvency. Therefore, based on the parameters as regards to credit risks it can be construed that the company is likely to display satisfactory levels of solvency during the financial periods. Dividend yield is considered another parameter for taking investment decisions because of the fact that it displays whether the stocks of a particular company are overpriced or not. Hirshleifer, Hsu and Li (2013) mentions that stocks with high dividend yields are overpriced as compared to those having a low degree of dividend yields. Risk averse investors seek investments with low dividend yield thereby at a dividend yield of 1.8% it can be inferred that the stocks of Cochlear are underpriced. However, at dividend of A$ 1.2 for each outstanding share it can be displayed that for investors seeking returns from their investment in Cochlear, the company’s stocks are not an attractive proposition. The analysis upon the revenue generating capability of Cochlear Limited shows that at average revenue growth of over 10% the company has efficient operations and sales management. The genre of providing hearing aid solutions has lesser degree of competition for Cochlear globally. The Altman Z score of nearly 3 shows the fact that the company has virtually negligible risks of going bankrupt. Thereby, investors can be advised towards including shares of Cochlear onto their investment portfolio based upon their degree of solvency. Moreover, analysis of the stock’s beta, belonging to Cochlear, shows that the beta stands at 1.2 which therefore displays the fact that the company’s stocks are subjected to high degree of volatility. Based solely on the beta levels it can be construed that the stocks posses high degree of risks with probability of gaining high degree of returns. Overall, judging by the different sets of parameters it can be concluded that in case of investors seeking lesser degree of risks in their investments Cochlear can be construed as a attractive investment proposition. This is owing to high revenue growth, satisfactory levels of dividend yield and sustainable degree of returns despite a beta of above 1. Allen, E.J., Larson, C.R. and Sloan, R.G., 2013. Accrual reversals, earnings and stock returns.  Journal of Accounting and Economics,  56(1), pp.113-129. Bloomberg.com. (2016). COH:ASE Stock Quote - Cochlear Ltd. [online] Available at: https://www.bloomberg.com/quote/COH:AU [Accessed 31 Oct. 2016]. Cochlear.com. (2016). Cochlear Hearing Implants | Official Website | Cochlear International. [online] Available at: https://www.cochlear.com/wps/wcm/connect/intl/home [Accessed 31 Oct. 2016]. Fama, E.F. and French, K.R., 2012. Size, value, and momentum in international stock returns.  Journal of financial economics,  105(3), pp.457-472. Google.ca. (2016). Cochlear Limited: ASX:COH quotes & news – Google Finance. [online] Available at: https://www.google.ca/finance?cid=671051 [Accessed 31 Oct. 2016]. Hirshleifer, D., Hsu, P.H. and Li, D., 2013. Innovative efficiency and stock returns.  Journal of Financial Economics,  107(3), pp.632-654. Intelligent Investor. (2016). COH. [online] Available at: https://www.intelligentinvestor.com.au/company/Cochlear-Limited-COH-249441 [Accessed 31 Oct. 2016]. Markets.ft.com. (2016). Cochlear Ltd, COH:ASX summary - FT.com. [online] Available at: https://markets.ft.com/data/equities/tearsheet/summary?s=COH:ASX [Accessed 31 Oct. 2016]. Sorescu, A. and Sorescu, S.M., 2016. Customer Satisfaction and Long-Term Stock Returns.  Journal of Marketing,  80(5), pp.110-115. Getting academic assistance from