Why the Cochlear share price dropped 4% lower today

The Cochlear Limited (ASX:COH) share price tumbled 4% lower on Wednesday after being downgraded by a leading broker…

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The Cochlear Limited (ASX: COH) share price was amongst the worst performers on the ASX 200 on Wednesday.

In morning trade the hearing solutions company's shares were down over 4% to $189.96.

They have since found a bit of support and narrowed their decline to 2%.

Why is the Cochlear share price sinking lower today?

As well as being subjected to general weakness in the healthcare sector today following the CSL Limited (ASX: CSL) half year result release, Cochlear's shares have come under pressure after being the subject of a broker note out of Morgan Stanley this morning.

According to the note, the broker has downgraded Cochlear's shares from an overweight rating to an equal weight rating.

Its analysts have, however, increased the price target on them by a dollar to $176.00.

Why did Morgan Stanley downgrade Cochlear's shares?

The broker made the move on valuation grounds. It upgraded the company's shares to an overweight rating in late November when they were trading around the $167.00 mark.

Prior to today, its shares had rallied around 19% since that upgrade to a level notably higher than what Morgan Stanley deems to be fair value, prompting today's downgrade.

Though it is worth noting that its analysts continue to be positive on Cochlear's long-term growth potential and believe its Sycle business will be a key driver of this.

Should you buy Cochlear shares?

Based on Morgan Stanley's forecasts for FY 2019, Cochlear's shares are changing hands at approximately 40x forward earnings.

Whilst this is admittedly expensive, I still see value in them if you're prepared to hold on for the next decade. This is because with populations across the world ageing, I believe demand for Cochlear's will grow strongly over the long term, positioning it perfectly to grow earnings at an above-average rate.

In addition to Cochlear, I think CSL and ResMed Inc. (ASX: RMD) would be great long-term options in the healthcare sector.

Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Cochlear Ltd. and ResMed Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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