The upgrade follows an onslaught of broker downgrades in recent months, including:
February 6 – UBS downgraded to Sell from Neutral and cut its target price to $240 from $260
January 24 – Citi downgraded to Sell from Neutral, retained target price of $255
January 8 – Barrenjoey downgraded to Neutral from Overweight but increased target price to $263 from $243.
The UBS downgrade coincided with a sharp 6.9% selloff for Cochlear shares.
The brokers, more broadly speaking, see valuations as elevated based on expected growth over the forecast period. They wanted to see more evidence of higher Cochlear implant unit sales growth and/or better-than-expected operating leverage.
Many analysts saw greater appeal in peers such as CSL and Resmed, which traded at forward price-to-earnings ratios of approximately 24x and 18.5x respectively, as opposed to Cochlear's 43x.
Cochlear upgraded its FY24 underlying net profit guidance to $385-400 million, which represents:
A 26-31% increase on FY23
An upgrade of 8% above the midpoint of the prior guidance of $355-375 million
A 7.5% beat against UBS forecasts.
“Cochlear implant trading conditions have been strong across the first half, with units growing 14%. We have maintained the market share gains made in FY23 and market growth has continued to be robust across both developed and emerging markets, as well as all age segments – children, adults and seniors," said CEO Dig Howitt.
"The key change to our expectations is that we now expect to achieve 10-15% growth in our cochlear implant units for FY24 compared to the high single-digit growth expected in August."
Before today's rally, Cochlear was up around 19% from November 2023 lows, marking a notable underperformance compared to peers such as CSL, which had rallied around 30%.
A guidance upgrade after several broker downgrades – now that doesn't happen very often! Brokers will likely nudge their target prices for Cochlear higher over the next couple of days.
It will be interesting to see if the guidance upgrade is enough for brokers to bump their ratings from Sell/Neutral to Neutral/Outperform. I'm a little sceptical because Cochlear still trades at a substantial premium relative to peers like CSL and Resmed.
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