Over the past year, Cochlear Limited’s (ASX: COH) share price high is $221.44. With shares up almost 20% in the last three months, could Cochlear reach these highs again?
About Cochlear
Cochlear is one of the world’s leading medical businesses. Cochlear designs, manufactures and supplies the Nucleus cochlear implant, the Hybrid electro-acoustic implant and the Baha bone conduction implant. Graeme Clark invented the first device in 1982, allowing first-user Graham Carrick to hear for the first time in 17 years. Some of the most recent modifications allow users to play sound from their phone directly into their implant.
The Positives
There is a lot to like about Cochlear. Through their technology and innovation, Cochlear has created a competitive advantage –- otherwise known as a moat –- and become the leading player in its industry. This comes with a lot of benefits, including brand awareness and some control over the prices they charge.
Cochlear also has a return on equity (ROE) of around 40%, far higher than most other comparable businesses. This shows that Cochlear has the ability to invest in projects that generate significant returns and value for shareholders.
Cochlear’s dividend yield is low, about 1.5%, but dividends have increased each year fairly consistently for some time now.
So, can Cochlear shares reach $220 again?
Valuation Looks Stretched
At the current price of $206.80, the valuation of Cochlear shares does look somewhat stretched. While the shares are only about 6.5% below the 52-week high, it might take some good news to get there.
Cochlear’s price-earnings (PE) ratio is 45x, significantly higher than other health care companies like CSL Limited (ASX: CSL), Ramsay Health Care Limited (ASX: RHC) and ResMed Inc (ASX: RMD). PE ratios are explained in this tutorial and video:
Based on a rough dividend valuation, the Cochlear share price also appears inflated. So, does this mean the shares are overvalued?
Ratios Aren’t Everything
Ratios and dividend valuations are only useful for getting a rough idea of a company’s value. The interesting comparison though is that Cochlear appears expensive next to a company like CSL, which is also a very high-quality company.
Cochlear shares may reach $220 again, but I wouldn’t feel confident buying at this price level. It’s a great business but I don’t believe there is a margin of safety right now.
I’d rather invest in one of the high-quality companies mentioned in the free report below.
[ls_content_block id=”14945″ para=”paragraphs”]
Disclosure: At the time of writing, Max does not own shares in any of the companies mentioned.
