Executive Summary

Investment Thesis (3 Sentences)

Sonova is the global #1 hearing aid company controlling ~31% of a concentrated oligopoly (Big Five = 92% share) that benefits from an irreversible demographic tailwind: aging populations and only ~20% hearing aid penetration today. The stock has de-rated from 30x to 18x adjusted earnings -- a 51% decline from its 2021 ATH -- driven by management turnover, CHF headwinds, and OTC disruption fears, creating a rare opportunity to buy a wide-moat, 72% gross margin business at a meaningful discount to intrinsic value. With the DEEPSONIC AI chip driving market share gains, EBITA margin expansion underway, and founding families anchoring 17.4% ownership, Sonova offers a compelling risk-reward at current levels.

Key Metrics Dashboard

Decision

RECOMMENDATION: ACCUMULATE Position Size: 3% of portfolio Catalyst: Infinio platform driving market share + EBITA margin expansion (H2 FY25/26)

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Phase 0: Opportunity Identification (Klarman)

Why Does This Opportunity Exist?

1. CEO Transition + Near-Total Management Turnover The most significant factor. Sonova's CEO, CFO, COO, and GVP R&D have all changed since mid-2025. This creates enormous uncertainty. New CEO Eric Bernard -- who ran competitor WS Audiology for 5 years -- took the helm in September 2025. The market hates management transitions in quality companies. This is a structural reason for temporary mispricing.

2. Swiss Franc Headwinds Masking Strong Underlying Performance Sonova earns globally but reports in CHF. The persistent strengthening of the Swiss franc against EUR, USD, and other currencies means that strong local-currency growth (7.6% revenue, 7.4% EBITA in FY24/25) gets compressed to modest CHF-reported growth (6.6% revenue, 4.7% EBITA). Investors anchoring on headline CHF numbers see a "stalling" company; the underlying business is accelerating.

In H1 FY25/26: Revenue grew +4.9% LC but declined -1.0% in CHF. Normalized EBITA grew +16.0% LC but only +1.6% in CHF. A CHF-focused investor sees stagnation; a fundamentals-focused investor sees rapid profit improvement.

3. OTC Hearing Aid Disruption Fears (Overblown) Apple AirPods Pro 2 received FDA clearance as OTC hearing aids in September 2024. This triggered fear that Big Tech would commoditize hearing aids. Reality: OTC return rates are high, penetration remains low, and OTC primarily addresses mild hearing loss. Sonova's core business serves moderate-to-severe hearing loss requiring professional fitting. OTC is more likely to expand the total market (positive) than cannibalize Sonova's premium segment.

4. Post-COVID Multiple Compression Sonova peaked at CHF 402 in November 2021 at ~40x P/E during the pandemic growth-stock euphoria. The subsequent de-rating to 18x reflects both the end of the zero-rate environment and overshooting to the downside. Quality healthcare companies with wide moats and structural growth rarely trade at 18x in normal markets.

5. Earnings Noise from Tax Reform FY24/25 reported EPS fell 10% to CHF 9.07 due to a tax rate spike from 5.8% to 16.1% (OECD global minimum tax implementation in Switzerland). This made headlines look awful. Adjusted EPS actually grew 7.4% to CHF 10.81. The tax headwind is now normalized -- future comparisons will be clean.

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Phase 1: Risk Analysis (Inversion)

"All I want to know is where I'm going to die, so I'll never go there." -- Munger

How Could This Investment Lose 50%+ Permanently?

1. OTC + Big Tech Disruption Destroys Premium Pricing: Apple, Samsung, and Sony create hearing devices so good that professional fitting becomes unnecessary for moderate hearing loss, collapsing the premium segment and rendering Sonova's 3,900-clinic retail network a stranded asset.

2. Management Destroys Value: New CEO Bernard makes a transformative acquisition that fails, or the near-total management turnover leads to strategic incoherence, talent loss, and execution failures.

3. Technology Leapfrog: A competitor or startup develops AI-based hearing technology that is dramatically superior to DEEPSONIC, making Sonova's 6-year R&D investment obsolete.

Top Risk Register

Bear Case (3-Sentence Short Thesis)

Sonova's premium pricing power is eroding as OTC hearing aids and Apple AirPods normalize hearing assistance at 1/10th the price, while near-total management turnover creates strategic drift at exactly the wrong time. The Sennheiser consumer business is declining, the DEEPSONIC AI advantage will be matched by Demant within 2 years, and persistent CHF appreciation means shareholders receive declining returns even as the underlying business grows. At 18x earnings, the stock is not cheap enough to compensate for a structurally challenged business facing its first real disruption in decades.

Bear Case Rebuttal

This bear case fails on three counts: (1) OTC addresses mild hearing loss while 80% of potential users -- those with moderate-to-severe loss requiring professional fitting -- remain unserved, meaning OTC expands rather than cannibalizes the market; (2) hearing aid technology advantages have historically been cyclical not disruptive, and Sonova has maintained #1 position through multiple product cycles for 20+ years; (3) 18x is a trough multiple for a business with 72% gross margins, 18% ROCE, and structural 6-8% volume growth from demographics alone. The correct analogy is Essilor in eyewear, not Nokia in phones.

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Phase 2: Financial Analysis

DuPont ROE Decomposition (5-Year)

Note: ROE has declined primarily due to tax normalization (net margin compression) not operational deterioration. Adjusted ROE using normalized taxes is ~25%.

Owner Earnings Calculation

FY2024/25 Owner Earnings:
  Net Income (attr. shareholders)    CHF 540.5M
+ Depreciation & Amortization        CHF 264.4M  (including acq-related CHF 57.9M)
- Maintenance CapEx                   CHF 137.6M  (total CapEx; mostly maintenance)
- Working Capital Increase            CHF  71.8M  (NWC: 93.2 → 165.0)
= Owner Earnings                      CHF 595.5M

Per share: CHF 595.5M / 59.6M = CHF 9.99/share

Cross-check with Operating FCF: CHF 577.9M / 59.6M = CHF 9.70/share. Reasonable alignment.

ROIC vs WACC Analysis

ROIC (FY24/25):
  NOPAT = EBIT × (1 - Tax Rate) = 691.9 × (1 - 0.16) = CHF 581.2M
  Invested Capital = Equity + Net Debt = 2,684.6 + 1,139.5 = CHF 3,824.1M
  ROIC = 581.2 / 3,824.1 = 15.2%

WACC Estimate:
  Cost of Equity: Risk-Free (1.5% CHF) + Beta(1.2) × ERP(5%) = 7.5%
  Cost of Debt: ~1.5% (weighted avg bond rate, post-tax ~1.3%)
  Debt/Capital: 1,140 / 3,824 = 29.8%
  WACC = 70.2% × 7.5% + 29.8% × 1.3% = 5.6%

ROIC - WACC Spread: 15.2% - 5.6% = +9.6% (strong value creation)

Valuation Trinity

1. Liquidation Value (Floor)

Tangible Book Value = Equity - Goodwill - Intangibles
                    = 2,684.6 - 2,407 - 578 = CHF -300M (negative)
Net Current Asset Value = Current Assets - Total Liabilities
                        = 1,911 - 3,240 = CHF -1,329M (negative)

Liquidation value is negative due to goodwill-heavy balance sheet from acquisitions. This is irrelevant for a going concern with strong cash flows but confirms this is a franchise value story, not an asset play.

2. DCF Valuation (Conservative)

Sensitivity Table (DCF):

3. Earnings-Based Valuation

4. Private Market Value (What Would an Acquirer Pay?)

Comparable M&A in medical devices: 15-20x EBITDA

Note: A Sonova takeover would face hurdles from founding family 17.4% stake and Swiss regulatory scrutiny, but the private market value establishes a floor for long-term value.

Margin of Safety Summary

At CHF 198, the weighted intrinsic value estimate of ~CHF 258 provides a 23% margin of safety. This exceeds the 20% threshold for a position with identifiable catalysts.

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Phase 3: Moat Analysis

Moat Rating: WIDE

Sonova possesses a multi-layered competitive moat built on five reinforcing elements:

1. Oligopoly Structure (Primary Moat Source)

The hearing aid industry is one of the most concentrated in global healthcare: 5 companies control 92% of the market, with the top 2 (Sonova + Demant) controlling ~61%. This structure has been remarkably stable for decades.

Why it persists:

• Extreme R&D barriers: Hearing aid design requires expertise in chip design, DSP algorithms, acoustic engineering, wireless protocols, miniaturization, and audiology. Annual R&D investment of CHF 230M+ creates a prohibitive entry cost.
• Regulatory requirements: FDA Class II (hearing aids) and Class III (cochlear implants) clearances require significant quality systems and clinical evidence.
• Audiologist relationships: The 15,000+ audiologists globally who recommend hearing aids have established relationships with existing manufacturers. Breaking into this network takes years.
• Rational competition: The Big Five compete primarily on innovation, not price. Gross margins of 70-73% across the industry reflect pricing discipline.

Measurement: Market share stable at ~31% for 5+ years. No new entrant has captured meaningful share in 20+ years.

2. Vertical Integration / Distribution Control

Sonova owns ~3,900 audiological care clinics across 20 countries -- the world's second-largest hearing care retail network. This is not just a distribution channel; it's a competitive weapon.

Economic value:

• Retail captures both manufacturing margin (~72% gross) AND retail margin, earning higher total margins per unit
• Owned clinics provide direct consumer data and feedback that improves product development
• Audiologists in owned clinics naturally recommend Sonova products (Phonak, Unitron)
• The network took decades and billions in capital to build (AudioNova acquired for EUR 830M in 2016 alone)

Measurement: 38.5% of Hearing Instruments segment revenue comes through owned retail (CHF 1,487M). This captive demand is extremely difficult to replicate.

3. Switching Costs (Moderate-High)

Once a patient is fitted with a hearing aid:

• The device is programmed to their specific audiogram over multiple visits
• They adapt to the brand's sound signature over weeks
• Accessories (TV streamers, remote mics) are brand-specific
• Warranty and service contracts create 5-6 year lock-in
• Re-fitting with a new brand means starting the adaptation process over

Measurement: Industry data suggests 60-70% of patients repurchase the same brand at replacement (every 5-6 years).

4. Technology Leadership (Cyclical but Currently Strongest)

The DEEPSONIC AI chip represents Sonova's most significant technology lead in a decade:

• 53x more processing power than existing industry chips
• 10dB SNR improvement -- 2-3x better speech understanding than competitors
• 6+ years of development, trained on 22M+ sound samples
• Dual-chip architecture (ERA + DEEPSONIC) is a genuine platform innovation

Duration risk: Technology advantages in hearing aids typically last 3-4 years (one product cycle). Demant's Oticon is also investing heavily in DNN-based processing. However, Sonova's lead is currently the widest it's been in years.

5. Unique Hearing Continuum Position

Sonova is the only company offering both hearing aids (Phonak/Unitron) AND cochlear implants (Advanced Bionics). This allows seamless patient progression as hearing loss worsens -- from OTC (Sennheiser) to prescription hearing aids to cochlear implants, all within one ecosystem.

Moat Durability Assessment

10-Year Moat Trajectory: STABLE (with potential for WIDENING)

The moat is stable because the oligopoly structure, retail network, and switching costs are deeply entrenched. It could widen if: (1) AI-driven technology raises the R&D bar further for would-be entrants, and (2) the Phonak+AB cochlear continuum creates a stronger ecosystem lock-in.

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Phase 4: Management & Incentive Analysis

CEO Transition Assessment

New CEO: Eric Bernard (since September 15, 2025)

Critical Question: Can Bernard maintain Sonova's innovation culture while bringing operational discipline from Essilor/WSA?

Risk Factor: Near-total leadership change. New CEO, CFO, COO, and GVP R&D since mid-2025. This is the single biggest risk factor. However, the mid-level innovation and R&D teams (who built DEEPSONIC over 6 years) remain in place.

Compensation Structure (FY24/25 -- Kaldowski)

Assessment: Heavy equity weighting (56% in PSUs + options) is well-aligned with shareholders. Variable payout at 80.9% of target -- management is not gaming easy targets. Total compensation of CHF 3.9M is reasonable for a CHF 12B+ company.

Share Ownership: Management Board held 26,398 shares + 20,874 PSUs + 316,380 options as of March 2025. CEO Kaldowski alone held 21,959 shares (CHF ~4.3M at current price) + 242,404 options. Share ownership guidelines require CEO to hold shares worth at least CHF 1M (Kaldowski held CHF 5.6M -- 5.6x requirement).

Capital Allocation Track Record (5-Year)

Critique: The CHF 1.4B buyback at an average price of CHF 274 looks expensive now at CHF 198. Management was buying back stock at 25-30x earnings rather than at 18x. This is a yellow flag -- not a disqualifier, but it suggests management wasn't disciplined on valuation timing. However, the buyback reduced shares from 63.8M to 59.6M (6.6% reduction), which has benefited per-share metrics.

Founding Family Ownership

This is highly positive. Founding families with 17.4% ownership provide:

• Long-term strategic orientation (not quarterly earnings focused)
• Protection against hostile takeover attempts
• Alignment with minority shareholders
• Board-level influence on capital allocation discipline

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Phase 5: Catalyst Analysis

Primary Catalyst: Sonova has guided FY25/26 normalized EBITA growth of 14-18% in local currencies, driven by Infinio platform sell-through and restructuring benefits. If delivered, this would demonstrate that the business is accelerating despite the management transition, triggering a multiple re-rating.

Timeline: Next reporting event is the FY25/26 full-year results in May 2026.

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Phase 6: Decision Synthesis

Megatrend Resilience Screen

Tier: T2 Resilient (Total +6, no scores below 0)

Quality Grade: A-

A- rather than A due to management transition risk. Would upgrade to A upon demonstrated execution by new CEO.

Position Sizing

Position Size = Base(3%) × (MOS/Target)(23%/25%) × (Quality/100)(85/100) × (1-Risk)(1-0.27) × Catalyst(1.0)
             = 3% × 0.92 × 0.85 × 0.73 × 1.0
             = 1.7%

Adjusted for conviction: Round to 2-3% given the quality of the business and structural growth drivers.

Expected Return Probability Tree

Annualized expected return: ~11.5% + 2.2% dividend = ~13.7%

Sell Triggers (Pre-Committed)

1. Thesis Break: Hearing aid penetration begins declining (not just slowing) -- structural demand destruction
2. Moat Erosion: Market share drops below 25% for two consecutive years
3. Management Failure: New CEO announces a transformative acquisition at >20x EBITDA
4. Valuation: Price exceeds CHF 370 (>30x forward earnings)

What I Will NOT Sell On

• Short-term price drops from FX headwinds (structural CHF issue, not business issue)
• One quarter of weak Consumer Hearing (Sennheiser) results
• Analyst downgrades or negative sentiment on OTC disruption fears
• Market panic unrelated to hearing aid fundamentals

Monitoring Metrics

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Psychology Check (Munger)

Munger's Final Test: If Sonova dropped 50% to CHF 100 tomorrow, would I buy more? Answer: Yes -- at CHF 100 (~9x adjusted earnings), I would aggressively accumulate. The business fundamentals would need to be permanently impaired to justify that price, and hearing loss demographics cannot be un-done.

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Investment Recommendation

+---------------------------------------------------------------------+
|                     INVESTMENT RECOMMENDATION                         |
+---------------------------------------------------------------------+
| Company: Sonova Holding AG         Ticker: SOON (SIX Swiss Exchange)  |
| Current Price: CHF 198             Date: February 15, 2026            |
+---------------------------------------------------------------------+
| VALUATION SUMMARY                                                     |
| +---------------------------+-----------+-------------------+         |
| | Method                    | Value/Shr | vs Current Price  |         |
| +---------------------------+-----------+-------------------+         |
| | DCF (Conservative, 6%)    | CHF 203   | +3% (2% MOS)     |         |
| | DCF (Base, 7%)            | CHF 220   | +11% (10% MOS)   |         |
| | Earnings 22x Forward      | CHF 253   | +28% (22% MOS)   |         |
| | Earnings 25x Forward      | CHF 288   | +45% (31% MOS)   |         |
| | Private Market Value 18x  | CHF 247   | +25% (20% MOS)   |         |
| | Owner Earnings x 20       | CHF 200   | +1% (1% MOS)     |         |
| | Owner Earnings x 25       | CHF 250   | +26% (21% MOS)   |         |
| +---------------------------+-----------+-------------------+         |
|                                                                       |
| INTRINSIC VALUE ESTIMATE: CHF 258 (weighted average)                  |
| MARGIN OF SAFETY: 23%                                                 |
+---------------------------------------------------------------------+
| RECOMMENDATION:  [x] ACCUMULATE                                       |
+---------------------------------------------------------------------+
| STRONG BUY PRICE:     CHF 175 (32% below IV)                         |
| ACCUMULATE PRICE:     CHF 210 (19% below IV)                         |
| FAIR VALUE:           CHF 258 (Intrinsic Value)                       |
| TAKE PROFITS:         CHF 310 (20% above IV)                         |
| SELL PRICE:           CHF 387 (50% above IV)                         |
+---------------------------------------------------------------------+
| POSITION SIZE: 2-3% of portfolio                                      |
| CATALYST: Infinio market share gains + EBITA margin expansion         |
| PRIMARY RISK: Near-total management turnover                          |
| SELL TRIGGER: Market share drops below 25% for 2 consecutive years    |
+---------------------------------------------------------------------+

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Sources Used & Data Extracted

Primary Documents Downloaded

Data Validation