Medical Technology
Hearing Aids: Sonova EW,
William Demant UW
Initiation on Hearing Aids sector: Attractive market,
but valuations reflect growth potential: Early
indications suggest volumes in the hearing aid market
are starting to recover; we expect global market growth
of c.5% p.a. from 2009 (c.1.3% 2008). William Demant
and Sonova should gain market share given superior
product portfolios and forward integration into the retail
space. In addition, we do not see the near-term threat of
negative pricing pressure that faces the orthopaedics
industry, and with the majority of hearing aids in the US
paid for ‘out of pocket’ the industry is less exposed to US
healthcare reform.
We prefer Sonova (EW) to William Demant (UW) as
potential resumption of buyback offers support:
Both stocks look fully valued. Our SFr117 PT for Sonova
offers 10% upside driven by potential resumption of its
share buyback, given our expectations for hearing aid
market recovery in 2009/10 and that the company has no
debt. William Demant’s DKr303 PT implies 16%
downside and we assume that the company will continue
to use cash to pay down debt, which is reflected in our
base case assumptions and in the current valuation in our
view. We model improvements in R&D efficiency in our
bull case, but these are unlikely in the near term and we
believe the company should command a discount on
growth given our concerns over execution.
P/E multiples look high but PEGs are broadly in line
with the orthopaedic and dental stocks: FY10 P/E
multiples of 19.1x and 23.9x (on MS estimates) for
Sonova and William Demant respectively, look high, but
given mid teens FY10-13 EPS CAGR for both stocks we
believe these are justified. On a FY10 PEG (based on
FY10-13 EPS CAGR) Sonova and William Demant
trade at 1.3 and 1.7, respectively, which is broadly line
with both the orthopaedics and the dental names.
However, we caution that with these stocks approaching
historical high valuations any market downturn could
see a shift out of these higher-beta names into more
defensive healthcare stocks such as large cap Pharma.