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The Cooper Companies Inc. (COO - Analyst Report) reported earnings and revenues for the fiscal third quarter ended Jul 31, 2013, both of which surpassed the Zacks Consensus Estimate. The company’s adjusted earnings of $1.74 per share exceeded the year-ago level of $1.45 by 20% as well as the Zacks Consensus Estimate by 3 cents. On a reported basis, earnings per share improved 31.6% to $1.79 from $1.36 a year ago.

Revenues in the quarter grew 8.9% to $412.0 million, ahead of the Zacks Consensus Estimate of $410 million, thanks to the solid CooperVision (CVI) and CooperSurgical (CSI) sales during the quarter and their continued market share gains.

Gross margin improved 160 basis points to 65.1% from 63.5% in the last year’s fiscal third quarter. The increase was attributable to lower royalty payments on silicone hydrogel lens sales, product mix and increased manufacturing efficiencies, partially offset by negative impact of currency, particularly the Japanese Yen.

Segment Results

Revenues in the CooperVision (CVI) segment rose 5% (9% in constant currency) to $330.5 million. Gross margin rose 200 basis points to 65% from 63% a year ago driven by the same factors affecting the overall gross margin of COO.

Revenues in the CooperSurgical (CSI) segment surged 27% to $81.5 million, driven by positive impact from the acquisition of Origio in Jul 2012. However, gross margin dipped 300 basis points to 64% from 67% in the last year’s quarter due to lower margins associated with the acquisition of Origio.

Financial Position

Cooper exited fiscal second quarter with cash and cash equivalents of $25.5 million as of Jul 31, 2013 compared with $12.8 million as of Oct 31, 2012. Total debt decreased 34.8% to $243.6 million as of Jul 31, 2013 from $373.7 million as of Oct 31, 2012. Consequently, debt-to-capitalization ratio decreased 540 basis points to 9.2% from 14.6% as of Oct 31, 2012.

COO generated $103.1 million of operating cash flow in the quarter. The company spent $38.6 million as capital expenditure yielding a free cash flow of $64.5 million in the third quarter.

Looking Forward

For the fourth fiscal quarter, Cooper Companies expects total revenues between $410 million and $425 million, including CVI and CSI revenues of $330 million–$340 million and $80 million–$85 million, respectively. Both reported and adjusted earnings are expected in the range of $1.76–$1.81 for the quarter.

For fiscal 2013, COO upgraded the lower range of its revenue guidance to the range of $1,586 million–$1,601 million compared with the earlier guidance of $1,575 million–$1,605 million, comprising CVI revenues between $1,271 million and $1,281 million (previously $1,260 million to $1,280 million) and CSI revenues between $315 million and $320 million (previously $315 million to $325 million).

Cooper Companies also upgraded its reported and adjusted earnings per share guidance for the fiscal year. The company now expects reported earnings in the band of $6.57 to $6.62 compared with the earlier range of $6.42 to $6.52 and adjusted earnings in the range of $6.23 to $6.28 compared with the earlier range of $6.15 to $6.25.

Free cash flow is expected in the range of $180 million to $210 million compared with the earlier range of $170 million to $200 million. The company's guidance excludes the financial impact for the proposed sale of Aime announced on May 31, 2013.

Our Take

The outlook for the contact lens industry is favorable. Trading up to value-added lenses, such as silicone hydrogel or one-day lenses, constitutes a major avenue for growth. A trade up to 1-day disposable lenses sharply increases per user sales and profit. The company continues to grow sales at higher than market growth rates.

Cooper Companies is a leader in the high-margin toric lens market. It offers multiple designs of toric lenses across a wide range of parameters, unlike some of its competitors, who offer toric lenses in a limited number of designs.

However, Cooper Companies faces formidable competition in each of its major product lines. Competition comes from well established global contact lens makers. Depressed levels of consumer spending have heightened the company’s competitive pressures.

Currently, COO carries a Zacks Rank #2 (Buy). Other medical stocks that also worth a look include STRAUMANN HLD N AKT (SAUHF) with a Zacks Rank #1 (Strong Buy), and Alphatec Holdings, Inc. (ATEC - Snapshot Report) and Align Technology Inc. (ALGN - Analyst Report), both with a Zacks Rank #2 (Buy).

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