By Carrie LaFrenz and Gus McCubbing
Cochlear’s chief executive Dig Howitt has alarmed investors with a shock earnings downgrade only two months after the hearing devices giant had published its forecast profit, blaming soft sales for its biggest products.
Investors sent Cochlear shares tumbling almost 41 per cent to $99.58, the lowest it has traded in a decade, as analysts described the downgrade as “staggering”. The sell-off in Cochlear’s stock was reminiscent of the bloodbath that occurred last year after global biotechnology giant CSL issued a surprising downgrade that led to its shares tanking and its then chief executive Paul McKenzie eventually being dumped.
The plummeting Cochlear share price reflected a lack of confidence among investors in one of the country’s biggest blue-chips after the downgrade of its full-year net profit expectations, which were almost a quarter below the guidance the company’s management gave in February.
“The market was already expecting a downgrade, but the magnitude of the downgrade, combined with the uncertainty around any future recovery was what really shocked the market,” said Wilson Asset Management portfolio manager Anna Milne, who sold out of Cochlear after being told of the hearing implant company’s funding struggles during a trip to an audiologist clinic in the US last year.
She said the shares still didn’t represent good value even after the almost 41 per cent fall on Wednesday. “It’s the largest drop in a large cap in some 25 years, but when you actually think about the composition of that decline, it’s around a 25 per cent earnings downgrade. And although it’s looking a lot cheaper than it has historically … we believe there is further room for value compression even from here.
“Until we have any comfort for Cochlear around greenshoots, particularly on the demand side for Cochlear implants, I don’t expect any room for valuation improvement from here.”
In February, Cochlear issued a statement that said: “We expect the business to deliver a strong second half.” But on Wednesday that guidance changed dramatically.
Cochlear cut its full-year underlying net profit guidance to between $290 million and $330 million. It had told investors in February that it expected earnings for the fiscal year to be at the lower end of its guidance range of between $435 million and $460 million.
“Cochlear confirmed our expectation of earnings risk to the second half 2026 earnings with a staggering underlying net profit after tax guidance downgrade,” said Jarden analyst Steve Wheen. “Overall, this downgrade is far worse than anticipated.”
Wheen remarked on Cochlear management’s “inability to forecast reliably”.
Cochlear’s management had already been on the back foot before the earnings downgrade. The company had been battling delays to the global rollout of its new hearing implant this year, and had already missed analyst consensus expectations when it reported its first-half underlying net profit in February, which fell 9 per cent to $195 million.
Bell Potter’s director of institutional sales and trading Richard Coppleson described the company’s downgrade to its full-year earnings as “extraordinary”.
“This is a real shock to many. We have seen our best two healthcare stocks now completely bludgeoned,” he wrote in his popular Coppo Report newsletter, referring also to CSL. “Those who sell Cochlear today are probably making the right decision. The stock is likely to keep falling from here, as they do 90 per cent of the time, and will be in the ‘sin bin’ for a long time.”
Cochlear was founded in 1981 as a subsidiary of medical technology company Nucleus and listed on the ASX in 1995. Since then, it has grown into a global business on the back of its pioneering Cochlear implant, an electronic device that improves hearing.
The company said in a statement that it was forced to make the downgrade after demand for its implants had weakened more than expected, and sales volumes in the United States declined, as record-low consumer sentiment meant customers were reconsidering discretionary healthcare decisions.
“Addressing hearing loss in adults and seniors continues to be treated as a discretionary intervention, highlighting the importance of our strategy to medicalise hearing loss so that treatment is recognised as an important health priority,” said Howitt.
Cochlear said demand also fell for its implants because of growing waiting lists for surgery in Western Europe. The Middle East conflict had also affected sales in that region, with Cochlear expecting order cancellations and the risk of delivery delays to some countries.
E&P analyst Sacha Krien said the downgrade reflected “a combination of weaker developed market cochlear implant volumes, emerging market uncertainty, margin pressure, and restructuring costs”.
“The acknowledgement that cochlear implant treatment in adults [in the US] is viewed as discretionary is a concern in the current environment,” he said.
Despite the downgrade, Cochlear’s Howitt said: “We remain confident of our market leadership. The clinical need for cochlear implants continues to grow, particularly for the adult and seniors segment.”
However, Jarden’s Wheen flagged growing competition from Cochlear’s rivals.
“An absence of new features and Cochlear’s expectation of a price premium opened the door to ongoing competitive pressures from Med-El and Advance Bionics. Our channel checks suggest the price premium is not sticking particularly in the US given there has been no change to reimbursement for this device.”
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