I believe Cochlear is materially overpriced (3rd September 2018) based on the following analysis:

P/E Ratio: I’ve analysed (company reports and my own analysis) company performance back to 2006 and focused on the period from 2010 onwards. Based on my analysis, it appears that the largest component of Cochlear’s share market performance has been driven by multiples expansion i.e. the P/E ratio as at 30 June 2018 was 46.9x [$200.17/$4.27] vs. 27.0x in 2010 [$74.32/$2.76] and 37.2x in 2006 [$54.63/$1.468]. The average 10-year P/E from 2008 onwards is 34.5x – therefore the current ratio is ~36% higher than the 10-year average which suggests the share price is overvalued.

EV/EBITDA ratio: Cochlear has a solid balance sheet and arguably does not have enough debt on the balance sheet. The current EV/EBITDA multiple is 30.3x (based on my analysis) which is nearly 50% higher than the average of 20.8x from FY10-18. Given this is a strong company with a premium product, high switching costs, complementary services revenues and good runway of success ahead, I could envisage a multiple of 20x to be reasonable but 30x appears over the top based on current growth rates.

Dividend Yield: the current dividend yield is 1.5% [$3.00/$200.17] relative to an average over the period FY10-18 of 2.8%. Again, this implies that either the dividend is too low or the share price is too high. The Company pays out ~70% of earnings which appears reasonable, implying that the share price is too high. Even assuming next year’s dividend is A$3.30, to get to a dividend yield of 2% would mean the share price would need to be A$165.

Future growth: EPS growth this year was 9.7%. NPAT growth (proxy for EPS) is forecast at 10% (at the midpoint) for the year ahead. In the forecasts, FX rates should be more favourable for the company (AUD/USD of 0.75 vs 0.77 previously and AUD/EUR of 0.63 vs. 0.65 previously) implying that constant currency growth may be less than 10%. Whilst growth rates at this rate are not to be sniffed at, my argument is that investors buying at today’s prices are paying too much for that future rate of growth.