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How Should You Price Cochlear Limited’s (ASX:COH) Stock?

Choosing the right financial tool to evaluate a company can be a daunting task, especially when different models are giving you drastically different conclusions. A prime example of conflicts between valuation models is Cochlear Limited’s (ASX:COH). While my discounted cash flow (DCF) model tells me that it is undervalued by 78.62%, my relative valuation model says it is overvalued by 12.84%. Which model do I listen to and more importantly why?

View our latest analysis for Cochlear

Examining intrinsic valuation

The DCF model follows the principle that a firm’s “true” value today is equal to the sum of all its the future free cash flows (FCF) it will make in the future (to infinity). Since the hardest part of constructing a DCF is forecasting this, I’ve decided to use the average expected FCF forecasted by broker analysts in my model. To obtain the per share intrinsic value of COH, we must first discount the sum of COH’s future FCFs by 8.55%, which gives us an equity value of A$6.37B. Dividing by 57.55M shares outstanding, we get an intrinsic share price of A$110.63. This means that the average broker analyst believes that COH’s true value should be closer to A$110.63 vs its current price of A$197.61. Check out the source of my intrinsic value here.,

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But how dependable is this value? Since it is generally impossible to forecast FCFs indefinitely, it is common for analysts to forecast for an explicit forecast horizon and then assume the company is mature by the end of that period and in a stable growth phase. At 14.97%, final year FCF growth is unsustainably high. If this FCF growth assumption held true, COH would theoretically overtake and eventually become the world economy given the GDP growth rate of most advanced economies is less than 5%. To improve our DCF analysis, we could extend the terminal year until FCF growth moderates to a more sustainable level around 1% to 5%. However, the trade-off is that there are less analyst forecasts the further in the future we go.

ASX:COH Intrinsic Value Jun 6th 18
ASX:COH Intrinsic Value Jun 6th 18

Deep-dive into relative valuation

While DCF models sum up future FCFs, relative valuation models are based on the idea that investors should pay the same price for two companies with identical risk and return profiles. Since the biggest dilemma is finding companies that are similar to COH, a viable proxy would be the overall Medical Equipment industry itself. Obtaining the fair value of COH through relative valuation is quite straightforward. We simply multiply COH’s earnings by the industry’s P/E ratio, which gives us a share price of A$172.24 that implies COH is currently overvalued. However, is this conclusion robust enough for us to use?

One quick way of finding out is to see if COH shares a similar growth profile to the overall Medical Equipment industry we are comparing it to. At 18.94% earnings growth next year, COH has a dramatically different earnings growth profile to the overall Medical Equipment industry, which is expected to grow at 34.85%. This demonstrates that the Medical Equipment industry is a weak proxy for COH, which undermines our relative valuation analysis. Instead, we could dramatically improve our analysis by hand-picking companies that share similar growth profiles with COH. I’d encourage you to do this by taking a look at COH’s competitors.

Which Model Should I Care About?

Neither model is perfect despite the robust financial theory behind them. Relative valuation is straightforward but prone to overall market mispricing. Meanwhile, intrinsic valuation is independent from market tendencies; however, is highly exposed to human error. Ultimately, investors should derive their final valuation based off both models. I encourage you to weight each model depending on your preferences to calculate a weighted average target price.

Next Steps:

For COH, there are three relevant factors you should look at:

  1. Financial Health: Does COH have a healthy balance sheet? Take a look at our free balance sheet analysis with six simple checks on key factors like leverage and risk.

  2. Future Earnings: How does COH’s growth rate compare to its peers and the wider market? Dig deeper into the analyst consensus number for the upcoming years by interacting with our free analyst growth expectation chart.

  3. Other High Quality Alternatives: Are there other high quality stocks you could be holding instead of COH? Explore our interactive list of high quality stocks to get an idea of what else is out there you may be missing!

PS. Simply Wall St does a DCF calculation for every AU stock every 6 hours, so if you want to find the intrinsic value of any other stock just search here.


To help readers see pass the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price sensitive company announcements.

The author is an independent contributor and at the time of publication had no position in the stocks mentioned.