People have always needed hearing aids, and the demand is expected to grow as the population increases and ages. In fact, the World Health Organization estimates that nearly 2,5 billion people worldwide, or 1 in 4, will be living with some degree of hearing loss by 2050. Sonova is one of the largest companies in the hearing aid sector and is well-positioned to benefit from this trend for decades to come. The question is whether Sonova is a good investment, which is what I will explore in this analysis.
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For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares in Sonova. If you would like to see the stocks in my portfolio or copy my portfolio, you can do so on eToro, You can find instructions on how to do this here. I don't own any stocks in competitors of Sonova either. Thus, I have no personal stake in Sonova. If you want to purchase shares (or fractional shares) of Sonova, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started with investing with as little as $100.
The Business
Sonova Holding is a Swiss company that manufactures and sells hearing care solutions. Founded in 1947 and headquartered in Stäfa, Switzerland, the company was formerly known as Phonak Holding before changing its name to Sonova Holding in August 2007. Sonova is a global leader in hearing care solutions, offering a broad portfolio across multiple segments to address various hearing needs. The company operates in four main business segments. The Hearing Instruments segment, which accounted for 47% of sales in Fiscal 2024, includes well-known brands like Phonak and Unitron. It offers a range of hearing aids, including receiver-in-canal, in-ear, and behind-the-ear devices. The Audiological Care segment, which made up 39% of sales in Fiscal 2023, is represented by the AudioNova brand and provides expert professional care through an omnichannel approach, combining physical stores with digital services for diagnostics, personalized fitting, and maintenance of hearing aids. This segment is supported by a network of over 3.600 audiological stores across 20 countries. The Consumer Hearing segment, which accounted for 7% of sales in Fiscal 2023, operates under the Sennheiser brand, providing premium audio products such as wireless headphones and enhanced hearing plugs. Finally, the Cochlear Implants segment, responsible for 7% of sales in Fiscal 2023, is associated with the Advanced Bionics brand. It serves individuals with severe to profound hearing loss by offering innovative cochlear implant systems. Sonova’s moat lies in its broad and diversified product range, strong brand recognition, and extensive distribution network, which together create significant barriers for competitors.
Management
The CEO of Sonova is Arnd Kaldowski. He joined the company in 2017 and became CEO in April 2018. Before Sonova, he was with Danaher Corporation, where he held various leadership roles since 2008, including Group Executive of the Diagnostics Platform and President of Beckman Coulter Diagnostics from 2013 to 2017. Arnd Kaldowski holds a Master of Science in Physics from the Technical University of Darmstadt, Germany, and an MBA from INSEAD in Fontainebleau, France. Throughout his career, he has led significant initiatives in sales growth, innovation, and productivity. He also brings extensive experience in M&A, commercial excellence, and new product introduction, gained during his time at Danaher and as SVP of Point-of-Care Solutions at Siemens Medical, along with previous roles as Investment Director at Atila Ventures and Manager at the Boston Consulting Group. This background has given him a strong track record in the healthcare industry. He is known for his focus on technology and innovation, digitalization, and customer proximity—qualities that are particularly advantageous for a company like Sonova. As CEO, he has overseen several major acquisitions, including the Chinese company HYSOUND, which expanded AudioNova by adding 200 stores and 650 employees in China, and the acquisition of Sennheiser. These moves have increased Sonova's presence in high-growth markets and opened new growth opportunities by entering the rapidly expanding market for wireless headsets. Overall, his experience and focus on growth make Arnd Kaldowski well-suited to lead Sonova into the future.
The Numbers
The first metric to examine is the return on invested capital (ROIC). We look for a 10-year history with all figures consistently exceeding 10% each year. Sonova has achieved a ROIC above 10% every year for the past decade, which is encouraging. Although the company hasn't managed to surpass a ROIC of 20% since 2015, it has maintained a ROIC above 15% every year since 2016, except for fiscal year 2021, which was affected by the pandemic. Excluding fiscal year 2021, Sonova recorded its lowest ROIC since 2018 in fiscal year 2024, which is slightly concerning. However, fiscal year 2024 was impacted by macroeconomic factors, creating challenges for most companies. Therefore, I expect ROIC to improve again in fiscal year 2025. Overall, the consistently high ROIC that Sonova has delivered highlights its quality as a company.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. I don't have the growth rate from 2013 to 2014 as Finbox only provides data for the past ten years. Sonova has shown mixed results over the years, with periods where equity has declined. Although equity has not returned to the peak levels of fiscal year 2021, it is encouraging to see that it grew in fiscal year 2024 after two consecutive years of decline. Additionally, it's worth noting that equity reached its second-highest level ever in fiscal year 2024, which is a positive sign.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that Sonova has achieved positive free cash flow every year over the past decade. However, free cash flow decreased slightly in fiscal year 2024, reaching its lowest level since fiscal year 2019. Management has noted that foreign exchange rates have negatively impacted free cash flow, as the Swiss Franc has been strong over the past few years. This is one of the reasons for the decline. The strength of the Swiss Franc has also affected the levered free cash flow margin, which is now at its lowest level since fiscal year 2019. Consequently, both free cash flow and the levered free cash flow margin could improve if the Swiss Franc weakens against other currencies. Additionally, the free cash flow yield is below the ten-year average, suggesting that the shares are trading at a high valuation. This is a point we will revisit later in the analysis.
Debt
Another important aspect to consider is debt. It is crucial to assess whether a business has a manageable level of debt that can be repaid within a period of three years. This is determined by dividing total long-term debt by earnings. After analyzing Sonova's financial statements, I found that the company has 2,59 years of earnings in debt, which is below the three-year threshold. This indicates that debt is not a concern when considering an investment in Sonova. It is also worth noting that management has done an excellent job of managing its debt. When debt levels increased following the acquisitions of Sennheiser and HYSOUND, management prioritized debt reduction over share buybacks, a strategy that I find commendable.
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Risks
Based on my findings so far, I believe that Sonova is an intriguing company. However, no investment is without risk, and Sonova faces its own set of challenges. Macroeconomic conditions present several risks, impacting its performance and profitability. One significant concern is the effect of weak consumer demand on the Consumer Hearing business. After strong growth in previous years, this segment encountered headwinds due to a general decline in the consumer electronics market. Factors such as high inflation and geopolitical tensions have reduced discretionary spending, especially in high-priced hearing care markets, leading to a slowdown in sales. Inflation has also increased operational costs, including higher expenses for transportation, components, and wages, putting pressure on Sonova's margins. While the company can pass some of these costs onto consumers, prolonged inflation could impact profitability, particularly if consumer sentiment remains weak. Foreign exchange (FX) volatility represents another macroeconomic risk for Sonova. Operating globally, the company generates revenue in multiple currencies, primarily the US dollar and Euro, but reports in Swiss Francs. FX fluctuations have created significant headwinds, including a 10% decline in EPS, as unfavorable currency movements directly affected revenue, EBITDA, and cash flow. Overall, macroeconomic factors such as inflation, currency fluctuations, and broader economic downturns can influence Sonova's sales, margins, and overall financial performance.
Competition poses a significant risk for Sonova, particularly in the long term, as illustrated by recent challenges in retaining key business contracts. A notable issue was the loss of a major contract with Costco, a significant U.S. retailer and one of Sonova’s largest customers. This loss highlights the intense competition Sonova faces, not only from established players like Demant and WS Audiology but also from emerging brands increasingly targeting large retail partnerships. These competitors are aggressively pursuing similar deals, offering competitive pricing and new technological innovations that appeal to both retailers and consumers. As a result, retaining or regaining major contracts has become more challenging, especially when large retailers have multiple options to consider. The experience with Costco also reveals a strategic challenge for Sonova. While the company continues to innovate and develop new products, it must effectively navigate price competition and maintain strong relationships with key customers to ensure long-term growth. If competitors keep undercutting prices or offer attractive deals to large partners, Sonova could face further pressure on its market share and pricing power.
Regulatory risks are significant for Sonova because the hearing care industry is subject to strict safety, quality, and efficacy standards worldwide. Compliance involves navigating various national regulations, such as approvals from the FDA in the U.S. and the EMA in Europe, which can delay product launches and increase costs. More stringent standards or regulatory changes may necessitate additional resources for testing, redesigns, and compliance. Sonova must uphold these standards even after a product is released, as compliance failures could lead to recalls, legal actions, and fines, adversely affecting both the company’s finances and reputation. The regulatory environment is dynamic, requiring Sonova to stay ahead of changes to ensure smooth market access. Failing to adapt could disrupt development and distribution, making effective compliance management essential for maintaining product quality, market presence, and financial stability.
Reasons to invest
There are numerous reasons to consider investing in Sonova, one of which is the global trends that favor the hearing aids industry. Sonova is well-positioned to benefit from several key trends driving long-term growth in the hearing care sector. One of the most significant is the aging population, particularly in major markets like China. As populations age, the prevalence of hearing loss rises, and many older adults continue to work and lead active lifestyles, creating a growing demand for hearing solutions. The World Health Organization estimates that by 2050, nearly 2,5 billion people, or one in four, will experience some degree of hearing loss, with at least 700 million requiring care and rehabilitation services. In emerging markets such as China, the rise of a growing middle class and increasing household incomes are making high-quality, technologically advanced hearing aids more affordable. While the current penetration in China is low—only about 3% of those with diagnosed hearing loss use a hearing aid—there is significant potential for growth as awareness and accessibility improve. Additionally, the Chinese government’s recognition of the importance of hearing health as part of overall public health initiatives creates a supportive environment for market expansion. As more people seek advanced products and services, Sonova is well-positioned to capitalize on these structural trends, making it an attractive investment in a growing, essential industry.
New products and technological innovation are central to Sonova's growth strategy, making it a compelling investment opportunity. The company continues to advance its technology, as seen with the extension of the Lumity platform across the Phonak portfolio, which improves speech understanding in noisy environments. Significant R&D investments have driven enhancements in processing power and data algorithms, helping Sonova stay at the forefront of the industry. Sonova's entry into the over-the-counter (OTC) market with the Sennheiser All-Day Clear capitalizes on new opportunities, particularly in the U.S., where regulatory changes have increased consumer access. Additionally, recent launches, such as the battery-powered Audéo Lumity and Terra models, cater to a wide range of needs, from budget-conscious consumers to those with severe hearing loss. By continuously innovating and expanding its product range, Sonova not only strengthens its market position but also captures new growth areas, ensuring a long-term competitive advantage.
Sonova's Audiological Care segment is a key growth driver, offering higher margins and strengthening the company's market position. By owning a large network of retail locations, Sonova benefits from both fitting fees and wholesale revenue, which enhances profitability. The company has strategically expanded this network through acquisitions, such as HYSOUND in China and Alpaca Audiology in the U.S., significantly increasing its presence in these important markets. Sonova’s omni-channel approach, which combines physical and digital services, improves consumer access and ensures a seamless experience. This vertical integration allows Sonova to control the customer journey, maintain pricing power, and boost sales, thereby supporting long-term growth and profitability.
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Valuation
Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 10,05, which is from 2024. I have selected a projected future EPS growth rate of 10%. Finbox expects EPS to grow by 9,7% in the next five years. Additionally, I have selected a projected future P/E ratio of 20, which is twice the growth rate. This decision is based on Sonova's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be CHF 128,87. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Sonova at a price of CHF 64,43 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 753, and capital expenditures were 85. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 60 in our calculations. The tax provision was 38. We have 59,626 outstanding shares. Hence, the calculation will be as follows: (753 – 60 + 38) / 59,626 x 10 = CHF 122,60 in Ten Cap price.
The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Sonova's Free Cash Flow Per Share at CHF 11,20 and a growth rate of 10%, if you want to recoup your investment in 8 years, the Payback Time price is CHF 140,89.
Conclusion
I find Sonova to be an intriguing company with strong management. I particularly appreciate that management has prioritized paying down debt over share buybacks following its recent acquisitions. Sonova has achieved a ROIC above 10% every year over the past decade, and above 15% in nine of the last ten years, indicating its quality as a company. While free cash flow has declined over the past two years, this is partly due to the strength of the Swiss Franc. Macroeconomic risks for Sonova include weakened consumer demand, rising costs from inflation, and foreign exchange volatility, all of which can pressure sales and profitability. Competition also presents a risk, as demonstrated by the loss of a major contract with Costco, highlighting the challenge of retaining key clients amid aggressive pricing and innovation from rivals. Regulatory risks stem from strict global safety and quality standards, which can lead to delays, increased costs, and compliance challenges. Failure to meet evolving regulations could result in recalls, legal actions, and reputational damage. Despite these risks, favorable global trends, such as aging populations and a growing middle class in emerging markets like China, are driving long-term demand for hearing aids, positioning Sonova for growth. New products and technological innovation remain key to Sonova's growth strategy, as the company invests in advanced solutions like the Lumity platform and expands into new markets with OTC products. This continuous innovation allows Sonova to meet diverse consumer needs and expand its market presence. Sonova’s Audiological Care segment is a crucial growth driver, offering higher margins through its extensive network of retail locations that generate both fitting fees and wholesale revenue. Strategic acquisitions and an omni-channel approach have enhanced consumer access, strengthened market presence, and supported long-term profitability by maintaining control over the entire customer journey. I believe Sonova is a quality company with great long-term potential. I will buy shares below the intrinsic value of the Ten Cap price of CHF 245.
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