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The Cooper Companies

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The Cooper Companies (COO - Free Report) delivered a 12.4% earnings surprise in the third quarter of fiscal 2012 (ended July 31) and raised guidance for the year. Moreover, this leading contact lens provider has now surpassed the Zacks Consensus Estimate in three of the last four quarters with an average surprise of 8.8%. Earnings momentum has improved in the wake of this solid quarter, helping the stock achieve a Zacks #1 Rank (Strong Buy) on September 11, 2012.

Cooper Cos. holds an almost 30% market share in specialty lens, multifocal and torics. The company continues to outpace the overall market growth rate in key niches.

Cooper Delivers Yet Again

On September 6, Cooper Cos. reported a 51.2% year over year surge in its third quarter net income to $66.9 million. Adjusted earnings per share of $1.45 beat the Zacks Consensus Estimate by 12.4% and the year-ago earnings by 26.1%.

Revenues moved up 8% (up 9% in constant currency and excluding acquisitions) to $378.2 million, surpassing the Zacks Consensus Estimate by 2.7%. Revenues from the contact lens division – CooperVision – were up 5% (up 10% in constant currency) at $314.2 million. The smaller women’s health unit – CooperSurgical – performed well with sales soaring 20% (up 6% barring acquisitions) to $64 million.

Gross margin was 63% in the reported quarter, higher than the 58% a year ago. The gross margin improved partly due to increased operational efficiencies for both divisions. Operating margin came in at 20%, up from 15% in the year-ago quarter.

On July 11, 2012, Cooper Cos. acquired Denmark-based Origio for about $147.4 million in cash. Origio is engaged in world-wide in-vitro fertilization and renders safer medical care for infertility.

Guidance Improves

For fiscal 2012, Cooper Cos. expects revenues between $1,439 million and $1,449 million, compared with the earlier range of $1,400 million to $1,440 million. The estimate for revenues comprises CooperVision sales of $1,186 million to $1,191 million and CooperSurgical sales of $253 million to $258 million.

The guidance for fiscal 2012 reported earnings per share was increased to between $5.10 and $5.15, compared with the prior guidance of $4.88 to $5.13. Meanwhile, the forecast for adjusted earnings was hiked to between $5.19 and $5.24 from the earlier forecast of $4.90 to $5.15.

Free cash flow is projected at $210 million to $230 million for fiscal 2012 compared with the earlier forecast of $200 million to $230 million. Free cash flow has traditionally been a good gauge for the turnaround of the company.

Earnings Estimates Move Up

Seven out of eight estimates have been revised higher for fiscal 2012 in the last 30 days, boosting the Zacks Consensus Estimate by 3.8% to $5.23, representing an estimated annualized growth of 16.1%.

For fiscal 2013, eight out of nine estimates have been revised upwards over the same time frame, helping the Zacks Consensus Estimate increase 4.3% to $5.81, reflecting a year-over-year growth of 11.1%.

Reasonable Valuation

Cooper Cos. looks reasonably priced with respect to most of the valuation metrics. The stock is currently trading at a forward P/E multiple of 18, a 1.5% discount to the peer group average of 18.2. The price-to-book ratio of 2.2 is 12.6% lower than the peer average of 2.5.

Chart May Indicate Breakout

After drifting downward last summer, the stock has rallied and is now trading above both its 50-day and 200-day moving averages. We believe the stock has potential to penetrate its resistance level.

Cooper Cos. has rallied 9.1% since its last earnings announcement on September 6, compared with a 2.3% return from the benchmark S&P 500.

Based in Pleasanton, California, The Cooper Companies has two business units, namely CooperVision (83.1% of company-wide sales) and the smaller CooperSurgical (16.9% of company-wide sales). CooperVision competes with Johnson & Johnson (JNJ) and Novartis (NVS) in the competitive contact lens market. CooperSurgical has a presence in certain niches of women’s health and has engaged in periodic tuck-in acquisitions. Cooper Cos. has a market cap of about $4.5 billion.

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