Sonova Stock Gains as UBS Upgrades to 'Buy' on Valuation, Product Cycle

Shares of Sonova (SOON) jumped over 5% on Wednesday after UBS upgraded the hearing aid manufacturer to “buy” from “neutral.” The bank raised its 12-month price target on the stock to CHF242 from CHF206, suggesting approximately 20% upside from its July 21 closing price of CHF200.40.

Rationale for the Upgrade

In a note to clients, UBS cited three primary factors for its more optimistic outlook, making Sonova its preferred name in the sector over rival Demant. The bank highlighted what it sees as a compelling investment case based on:

• Valuation: Sonova is trading at its most attractive relative valuation compared to Demant since 2021.
• Product Cycle: The company has a "compelling and underappreciated" receiver-in-canal product cycle.
• Earnings Outlook: UBS's earnings estimates for Sonova are significantly above market consensus.

Valuation and Estimates in Focus

UBS analysts noted that Sonova is trading at a price-to-earnings discount of nearly 5% relative to Demant, a sharp contrast to its five-year average premium of 15%. The bank attributed this gap to recent investor focus on a segment where Demant has gained market share.

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The new price target is based on a discounted cash flow model using a weighted average cost of capital (WACC) of 8.2% and a terminal growth rate of 2.0%. UBS also raised its adjusted diluted earnings-per-share (EPS) estimates for fiscal years 2027 through 2029, placing them between 4% and 6% above the Vara consensus forecasts for the period.

Broader Market Context

According to UBS, the hearing aid industry has outperformed the broader European medtech sector by more than 20% over the past three months, a trend the bank expects to continue. Analysts see the sector as relatively insulated from several headwinds facing the wider medtech space, including slowing U.S. elective procedure volumes, cost inflation, and China's volume-based procurement reforms.

Sonova, based in Switzerland, is the largest company in the approximately $7 billion global hearing aid market. The firm derives about half its revenue from hearing instruments and another 40% from audiological care services.