By David H. Kirkwood
LONDON–Bernstein Research, a leading analyst of the hearing aid industry, sees continued growth and higher stock prices in 2015 and beyond for GN Store Nord (GN), parent company of ReSound. However, as the title of its latest report, Hearing Aids: A Review of the Major Sector Trends Going into 2015. Still Prefer GN and Would Stay Away from the Others, makes clear, the British-based Bernstein is not bullish on the two other publicly owned hearing aid manufacturers, Sonova, which owns Phonak et al., and William Demant, parent company of Oticon et al.
Since the Bernstein report is designed to help investors, it does not discuss the three other major hearing aid companies–Siemens Hearing, Starkey, and Widex–which are privately owned.
Written by Bernstein senior analyst Lisa Bedell Clive, the December 11 report states, “We continue to see GN as best positioned” for growth. If that’s correct, it will be a continuation of a recent trend. Over the past three years, Clive reports that revenue growth at GN’s hearing aid business has averaged about 9% a year, compared to about 7% for Sonova and about 5% for Demant.
WHY ReSOUND?
Lisa Bedell Clive
Why does Clive believe that ReSound has the best investment prospects among the world’s three largest hearing aid makers? Her report for Bernstein cites a number of factors.
One is its “leading technology position (based on its 2.4GHz technology and the made-for-iPhone LiNX).”
Another reason is that, unlike the solidly entrenched market leaders—Sonova and Demant—GN/ReSound is on a strong upswing. After its sale to Sonova fell through in 2007, the company lagged behind for several years, and its revenues and margins deteriorated. But since then, in part because of successful new product releases, including the Alera platform in 2010, “the ReSound brand managed a remarkable turnaround,” says Clive, and it began to make up for lost ground.
The Bernstein analyst adds, “We believe the turnaround has now positioned GN for multiple years of above-market growth… After years of being regarded as a second-tier player in the hearing aid industry, GN has finally managed to reach parity with the top-tier manufacturers… This has put GN in a position to gain notable share, as audiologists who previously had no interest in buying from GN (particularly U.S. independent audiologists) now see them as a reliable and high-quality supplier.”
ROOM FOR GROWTH IN THE INDEPENDENT MARKET
The report goes on to describe the mechanism by which ReSound’s anticipated continued growth may occur.
Clive states, “Channel exposure is the main driver of differentiated performance. Our views on the hearing aid industry maintain that relative performance between the three publicly traded hearing aid companies over the long term will be driven primarily by positioning across sales channels.”
In the case of GN/ReSound, Clive sees “a unique opportunity” for it to grow its market share, notably with independents, since its share of this market is so small, especially in the U.S., where it is estimated at 8% compared to Sonova’s 38% and 33% for Demant.
Even though Bernstein reports that the independent retail share of the total worldwide hearing aid market has decreased from 59% in 2004 to 48% in 2013, as sales to retail chains, manufacturer-owned stores, and government have all increased, it is still the largest part of hearing aid manufacturers’ business and one with a high profit margin.
SONOVA AND DEMANT
While Clive is bullish on ReSound’s stock, she does not see Sonova and Demant as good investments at this point. In the case of Sonova, her report suggests that its stock price, the highest in the industry, is based on “unachievable growth expectations.”
Her take on Demant is that it “is undergoing a structural transition due to shifting sales channels in the hearing aid market that will limit earnings growth in the coming years.”
In an e-mail, Clive told this blog, “I still expect Sonova and Demant to continue growing sales, but at much slower rates than historically, and below what the investment community is expecting.”
To obtain Bernstein’s full report or other of its analyses of the hearing aid market, e-mail [email protected].
While I’m not doubting GN may be poised for growth, “notable” expansion among independent hearing care practices is highly over-blown. Do they not recall the issue with Phonak this past year and how many independents stopped working with Sonova altogether? A similar event happened earlier with ReSound a few years earlier, with many independents shifting away from their products as they began to appear in the big box stores under the ReSound label.
In this audiologist’s humble opinion, I don’t see GN overtaking any significant amount of marketshare in the independent realm from Starkey, Oticon, and the others. They clearly underestimate the long-term effects of such decisions. The reality is, ReSound is not the only game in town with iPhone compatible hearing aids: they’ll have to come up with something much bigger to see a substantial increase in sales to independents.