European Stock Story of the Month – Sonova

Who knows what Ludwig van B might have achieved if he had access to the newly launched Phonak Audéo™ Paradise multifunctional hearing aid. I do wonder whether an essential part of the beauty of Beethoven’s music comes from his disability. He must, however, have missed out on much of the musical creativity of the age, having a major impact, making for an isolating experience – one of loss. Deafness is ubiquitous today. There are around 12 million people with some form of hearing loss in the UK. That’s around one in six of us. Within fifteen years that figure is estimated to have grown to over 14 million. Of the 50,000 children with hearing loss in the UK, half are born with the condition.[1] Of all the impairments, deafness is the one most associated with humour and jokes, but the sad fact is that, left untreated, sufferers are well known to face isolation, loneliness and depression.

October’s stock story of the month is Swiss company Sonova (www.sonova.com). Founded in 1947, Sonova is a leading provider of innovative hearing care solutions, be they more traditional hearing aids worn behind the ear, or cochlear implants which require intricate surgery. Offering a number of brands both developed internally and acquired via mergers and acquisitions. Sonova is the leader in its industry to develop and launch new technologies in the field,[2] and its consistent ability to innovate and deliver new solutions we feel is a key competitive advantage. Your correspondent is deaf, and what is a source of amusement and jocularity to some people (the pestiferous teenagers mainly) is a source of huge frustration and isolation to him. Without my Phonak Audéo™ (generation minus 2 from the Paradise) I would forgo the delighted drifts of the skylark and the whirr of the cricket, all lost to percussion damage from sustained rifle fire in the 1980’s where ear protection got in the way of marksmanship and the cost of trophies is measurable in disappeared hertz. Sonova is a personal experience for me but liking the product doesn’t necessarily make for a good investment. The way the company develops new technologies to keep up with our digital life is testament to its ‘vision of a world where everyone enjoys the delight of hearing, and therefore lives a life without limitations’.[3]

So what are the characteristics of this investment case? We can question if the price of Sonova’s products is too high for consumers and whether the prospect means the share price is too high. We agree that it is a highly valued company, but we believe justifiably so. We consider this an exceptionally well-run company which understands the power of its culture and is adept in succession management. When previous CEO Lukas Braunschweiler announced his retirement, the board brought in Arnd Kaldowski into the role of Chief Operating Officer for a transition period until he was up to speed with the systems and culture, taking over from Lukas six months later. R&D is rising as a percentage of sales to 5.6% in the latest annual report.[4] This has allowed the company to sustain its lead in innovation with technologies such as motion control, dynamic directional microphones and noise cancelling as well as offering an app interface which is system agnostic (operates on all smartphones). But the tour de force is its future prospects. The market for hearing devices continues to grow at above 4% per annum[5] which in a post-COVID world is a feat.

Given likely market share gains, and some potential for add-on acquisitions to its vertically integrated business model, Sonova is a company that we consider capable of achieving a sustainable advantage over competition. Its ability to maintain new product launches, a sensible ‘protect the core’ business policy of targeted cost cutting in response to the pandemic, and the readiness of senior management to take a significant salary cut to lead by example during tough times, are all strong signals. We also like the fact that Sonova listens to challenge on issues of governance. Their Investor Relations team have regular communication with proxy voting advisors, with whom many investors consult on shareholder voting issues. This is a company clear in its attitude to continuous improvement. Music to my ears anyway.

[1] https://actiononhearingloss.org.uk/about-us/research-and-policy/facts-and-figures/

[2] https://www.statista.com/statistics/1087388/global-hearing-aid-market-share-by-company/

[3] https://www.sonova.com/en/sonova-0

[4] https://relaunch.sonova.com/cdn/ff/WSUrtIspZ63tlWbDR2V8W1TMUzEkTw8S_HiGUvLFduU/1589860231/public/2020-05/08_Sonova_AR_2019_20_Financial_report_en.pdf?_ga=2.153013690.2082434196.1602237075-786038622.1589880931

[5] Source: Sonova

Information is accurate as at 16.10.2020. Opinions constitute the fund manager’s judgement as of this date and are subject to change without warning. The officers, employees and agents of CIP may have positions in any securities mentioned herein. This material may not be distributed, published or reproduced in whole or in part. With investment capital is at risk.

STEUBLOGRH/16102020