Summary
- Hearing Care is a growing market that affects more people over time as our average life span increases.
- The sector has secular tailwinds and offers modest growth.
- Sonova is the market leader and has a strong management team behind it.
- Sonova is a buy after a sharp fall in stock price over the last year.
The hearing aid industry has been steadily growing, with technological advancements and an aging population driving demand for these devices. As a result, investing in the hearing aid industry could be a wise financial decision for those looking to diversify their portfolios and tap into a growing market. In this article, I will look closely at the industry leader Sonova Holding ( SONVF ) and explore why now may be an excellent time to consider investing in the company. Sonova largely grew in line with the SPY until the Covid pandemic shook markets. After a significant spike in 2021, the company is now down significantly from highs and might offer a compelling opportunity for investors.
A modestly growing industry
According to Fortune business Insights , the hearing aid industry is expected to grow to $17.68 billion in 2029, representing an 8.1% CAGR from the current level. Below, you can see how Sonova categorizes the market itself into three segments:
- The 6-7 billion CHF (Swiss Francs, currently 1 Swiss Franc equals 1.09 USD) Hearing Instruments Manufacturing market. These are the usual instruments you'd think of when you are asked about hearing aids. Sonova expects the market to grow at a modest 3-5% and is the market leader.
- Audiological Care: This is specialist retailing, where trained professionals help customers through their journey to a fitting device. This is the largest part of the industry, with 11-12 billion CHF and a similar 3-5% CAGR. Sonova is only the #2 behind Amplifon ( AMFPF ).
- Cochlear Instruments Manufacturing: This small (1.5 billion CHF) but fast-growing (5-10% CAGR) market is for devices that are needed for much more severe hearing loss. These devices must be surgically implanted and come at a much higher price. Based on the units Sonova estimates, we can see that each Cochlear Instrument should be >23000 CHF, versus 370 CHF for a regular hearing instrument.
- The hearing care market, consisting of the segments mentioned above, is worth around 19-20 billion CHF and Sonova is the market leader before Demant ( WILLF ).
Long-term tailwinds from an aging population
I believe that the growth in this industry will accelerate in the coming decades. Hearing care is still stigmatized; people do not want to seem 'old' by wearing a hearing aid. This leads to a very underpenetrated and unaware market. Often people who think they have a problem do not seek to get themselves checked. This leads to a modest market penetration of 30.9% in developed countries, a global penetration of 9.6% and a shockingly low 3.4% in developing countries. Especially China and India could provide tailwinds as they create a middle class.
How the Sennheiser Acquisition can help
In 2021 Sonova acquired the Sennheiser Consumer business for 200 million Euro or around 0.8 times sales. This acquisition has several rationals behind it:
Sonova is run by ex-Danaher ( DHR ) executives that implemented a system similar to the Danaher Business System called Sonova eXcellence. This Kaizen framework promotes high internal promotions within the talent pool, growth and continuous improvement. Sennheiser manufacturing was very inefficient and Sonova already managed to increase output by 40% while streamlining costs and implementing Kaizen into the facility when they gave an update last October.
The acquisition with Sennheiser also allows for synergies in R&D and distribution. My favorite part about the acquisition (besides being a loyal Sennheiser user) is the increase in customer base, especially with a younger audience. In the last segment, I mentioned that many people are unaware of their hearing problems or don't want to acknowledge them. With Sennheiser consumer products, Sonova will get insights into a whole new cohort of customers. To truly leverage this strategy, the company is testing a new device that combines wireless headphones with hearing aids. These devices will feel like regular earbuds but have enhancing features to help people in an early stage of hearing loss. This could help take away some of the stigmas around the topic. I think this strategy will take time, but I like the approach. I also believe that initially, there will be a reluctance to pay the price for a hearable from the people used to earphone prices that don't know the cost of hearing aid devices. I will follow this development with excitement over the next years. Lastly, Sennheiser also opens up a new adjacent vertical with the already mentioned wireless headphones. The market is still growing, especially in Europe.
Aligned incentives
Show me the incentive and I will show you the outcome - Charlie Munger
Sonova has a good alignment with shareholders. The short-term cash compensation is tied to sales, EBITA, FCF, and EPS targets, together with ESG and individual objectives. The long-term compensation relies on ROCE and total shareholder return. The long-term compensation ranges from 0-294% for the CEO and 0-167% for the other executives, putting real consequences in pay behind underperformance over the long term. Additionally, to these incentives, the company still has around 15% of insider ownership by the founders and their families.
Capital allocation
Sonova has four pillars for its Capital Allocation strategy that are aimed at creating shareholder value over the long term. Management is prudent with shareholder capital, which is evident in its strong ROCE of over 20%. Besides the Sennheiser acquisition, Sonova is also expanding its Audiological Care network via CapEx and acquisitions.
A compelling valuation
Sonova has come down a lot after its overvaluation during Covid and is now trading below its ten-year median multiples across the board. At an almost 5% FCF yield, 14 times EBITDA, and 19 times earnings, I believe Sonova to be an attractive opportunity as the leader in a market with long secular tailwinds and capable management. I personally have a 3.4% position in Sonova in my concentrated (21 individual stocks) portfolio.
For further details see:
Sonova: Buy This Beneficiary Of An Aging Population