Company Reports

Narrow-moat Sonova reported 7% sales growth for second-half fiscal-year 2023-24 compared with the prior half despite a currency depreciation headwind during the year. The growth rebound aligns with our expectations as the industry gains momentum. We believe that momentum can persist for the coming year but not at the level of Sonova’s overly optimistic outlook, in our view, of 6%-9% sales growth and 7%-11% adjusted EBITA growth in local currencies, or LC. Our fair value estimate of CHF 268 per share is unchanged.

We are maintaining our fair value estimate of CHF 268 for narrow-moat Sonova following the publication of first-half results. We currently view shares as modestly undervalued.

Sonova benefits from favorable trends, including an aging population, increasing noise pollution, fairly low penetration rates for hearing aids in the developed world, and virtually untapped patient populations in emerging markets. Its broad product offerings should allow the company to capitalize on these trends, while its strong brand and superior technological know-how should yield market share gains.

We are maintaining our fair value estimate of CHF 268 for narrow-moat Sonova following the publication of 2022-23 fiscal year earnings. Reported EBIT came in under consensus expectations, CHF 746.7 million versus CHF 781 million, as market growth remained slow, with continuing economic uncertainty delaying hearing aid replacement cycles. We currently view shares as fairly valued.

Sonova benefits from favorable trends, including an aging population, increasing noise pollution, fairly low penetration rates for hearing aids in the developed world, and virtually untapped patient populations in emerging markets. Its broad product offerings should allow the company to capitalize on these trends, while its strong brand and superior technological know-how should yield market share gains.

We anticipate a modest decrease to our CHF 290 fair value estimate for narrow-moat Sonova as we incorporate persisting supply chain challenges and soft growth in key markets, including the United States. While management hasn’t revised guidance, it has indicated that it believes Sonova to be toward the lower end of the previously stated 15%-19% sales growth for fiscal 2022-23. We currently view shares to be undervalued.

We are anticipating a moderate decrease in our fair value estimate of CHF 290 per share for narrow-moat Sonova following management’s guidance downgrade after the first quarter of fiscal-year 2022-23. This comes due to weaker-than-expected revenue and increased expenses driven by transportation and component costs and inflation. We aren’t making any changes to our moat rating.

Sonova benefits from favorable trends, including an aging population, increasing noise pollution, fairly low penetration rates for hearing aids in the developed world, and virtually untapped patient populations in emerging markets. Its broad product offerings should allow the company to capitalize on these trends, while its strong brand and superior technological know-how should yield market share gains.

We anticipate a modest increase to our CHF 227 fair value estimate for narrow-moat Sonova following our model update to reflect year-end results as well as the completed acquisitions of Sennheiser's consumer division and Alpaca Audiology as part of the audiological care segment. Management expects a CHF 400 million revenue contribution from the newly formed consumer hearing business, resulting in full-year 2022/2023 revenue growth guidance of 17%-21% before returning to its midterm target revenue growth of 6%-9%. We currently consider the shares overvalued.

We anticipate a moderate increase to our CHF 227 fair value estimate for narrow-moat Sonova as a result of a better-than-expected hearing industry recovery in the first half of 2021-22. Despite the anticipated fair value estimate increase, we currently view the shares as overvalued.

Since 2017, when the U.S. Congress allowed for over the counter (OTC) hearing aid sales, there has been minimal progress in the creation of regulations to enable hearing-impaired Americans to access these low-cost options. On July 9, President Biden prompted the U.S. Department of Health and Human Services via executive order to create a proposal of necessary rules for OTC hearing aid sales within 120 days. This prompted shares of all hearing aid manufacturers to dip as investors apparently fear the prospects of increasing competition and pricing wars. Our take on it is more sanguine--while the new directive does offer an easier pathway for OTC devices to compete, its impact will likely be confined to lower-end devices and largely absorbed by the manufacturers without material damage. We maintain our moat ratings and valuations for all hearing aid companies under our coverage.

We are increasing our fair value estimate to CHF 227 from CHF 174 for narrow-moat Sonova, as we updated our forecasts following the release of fiscal 2020-21 results on May 18. We have raised modestly our forecast for fiscal 2021 roughly in line with management guidance of 24%-28% revenue growth and 34%-42% adjusted EBITDA growth. At current levels, we view share prices as overvalued.

Sonova benefits from favorable trends, including an aging population, increasing noise pollution, fairly low penetration rates for hearing aids in the developed world, and virtually untapped patient populations in emerging markets. Its broad product offerings should allow the company to capitalize on these trends, while its strong brand and superior technological know-how should yield market share gains.

We anticipate a modest increase to our fair value estimate for narrow-moat Sonova as we update our model following the release of fiscal 2020-21 results. Hearing industry is starting to slowly recover as older at-risk individuals, which comprise a sizable portion of the industry’s client base, get vaccinated. All Sonova’ segments saw growth in local currencies year over year in the second half.

We are updating our model for narrow-moat Sonova and anticipate to moderately raise our fair value estimate in response to quicker-than-anticipated recovery in the global hearing market, with Sonova reaching high-single-digit revenue growth for the month of September year over year. Even with the expected fair value estimate increase, we view shares as overvalued.

We are maintaining our fair value estimate of CHF 174 per share for narrow-moat Sonova as the hearing instrument market in the United States and large countries that imposed strict lockdown measures to combat the coronavirus pandemic lags the global recovery. Despite a rebound in certain markets, such as Germany, where hearing instrument demand increased between 11% and 37% year over year for June through August (suggesting pent-up demand), the largest market for the company, the U.S., remains sluggish. The U.S. Veteran Affairs, or VA, channel saw continuing declines in the summer months, with unit sales down between 42% and 64%, and slightly improving in September (down 25%). The U.S. alone accounts for nearly one third of Sonova’s revenue in fiscal 2020 with the VA contributing heavily. Our previous fiscal 2021 revenue outlook remains roughly in line with the newly published management guidance and we view shares as slightly overvalued.

Sonova benefits from favorable trends, including an aging population, increasing noise pollution, fairly low penetration rates for hearing aids in the developed world, and virtually untapped patient populations in emerging markets. Its broad product offerings should allow the company to capitalize on these trends, while its strong brand and superior technological know-how should yield market share gains.

We have recently revised down our forecasts and fair value estimates for all three hearing aid manufacturers in our coverage as we anticipated a material slowdown in the foot traffic affecting both wholesale and retail segments. Narrow-moat Sonova's fiscal 2020 results (ended March) and the commentary around March volumes and 2021 expectations confirm our assessment of a challenging year ahead. With the fiscal 2021 outlook remaining highly uncertain, we maintain our downward-revised forecast and our fair value estimate for the firm. We do not anticipate a business recovery until midyear at best but more likely not until calendar 2021 (assuming no second wave of the coronavirus pandemic).

We're revising down our forecasts and fair value estimates for all three hearing-aid manufacturers in our coverage universe. With the customer base skewed to older individuals, the current Covid-19 epidemic will likely be very disruptive for these firms, and we do not anticipate the demand to return until early to mid-2021. We're lowering fair value estimates for Sonova and Demant by 10% to CHF 169 and DNK 178 respectively, and GN Store Nord by 5% to DNK 269. We're maintaining our narrow-moat ratings for all three firms. At current prices, Demant represents the most compelling investment opportunity, with shares still not fully recovered from the hacking incident and now further depressed by the sell-off.

Sonova benefits from favorable trends, including an aging population, increasing noise pollution, fairly low penetration rates for hearing aids in the developed world, and virtually untapped patient populations in emerging markets. Its broad product offerings should allow the company to capitalize on these trends, while its strong brand and superior technological know-how should yield market share gains.