Morningstar gave Sonova Holding AG an enthusiastic thumbs-up this week, adding the Swiss manufacturer of hearing instruments and wireless communications systems for audiology applications to its vaunted "Best Ideas" list.
After attending the industry's AudiologyNOW conference, Morningstar analysts came away convinced that Sonova (SOON.VX) will remain among the frontrunners in the hearing aid and audiology applications industry.
"The hearing aid industry should see strong expansion over the next decade as a result of favorable demographic trends and increasing penetration rates," analyst Alex Morozov wrote in a research note. "With 800 million people worldwide affected by hearing loss and penetration rates even in the developed world (more than 120 million people) barely exceeding 25%, the hearing aid industry has strong expansion opportunities ahead."
Sonova is the world's largest manufacturer and distributor of hearing aids and that's a good thing to be right now considering roughly 16% of the world's population is suffering from some degree of hearing loss and it's expected to grow to more than 20% as Baby Boomers continue to age.
"Sonova has captured a leading position in the growing hearing aid market on the strength of its product portfolio, brand recognition and distribution network," Morozov added.
Today, the company controls roughly 25% of the hearing aid market, much of which is concentrated in the higher-end offerings that cost the most and have the highest profit margins.
"Sonova enjoys a stellar reputation among audiologists -- the driving force behind purchasing decisions -- in part because of its continuous innovation efforts that result in a two- to three-year product upgrade cycle," he added. "Thus, the firm stays ahead of the curve with new product introductions, allowing it to maintain technological superiority over competitors -- the key determinant in the high-end market with inelastic demand."
Sonova shares are trading at around $88 a share, down from a peak of $137.40 back in July.
Morningstar is forecasting annual volume growth of between 5% and 6% over the next 10 years in developed markets with emerging markets expected to grow even fast in the years ahead.
"Sonova's shares trade at a discount to our fair value estimate, representing a compelling opportunity," Morozov said.
