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Reaffirming Cooper at Neutral

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We remain Neutral on The Cooper Companies (COO - Free Report) , a prominent player in the global contact lens market. Revenues and earnings beat the Zacks Consensus Estimates in the first quarter of fiscal 2012.

Industry outlook has improved with an expectation of rising utilization in the emerging nations and a higher proportion of sales of value-added lenses. Cooper proves to be a turnaround story based on rationalization of plants and better execution. It remains a leader in torics. The company 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.

Based on manufacturing efficiency emanating from the closure of the Norfolk plant and shift in product mix in favor of higher-margin silicone hydrogel lenses, operating margin is expected to pick up.   

Among other positive factors, recent product launches may provide a boost in 2012. Cooper has reduced debt with improved free cash flow which opens up room for tuck-in acquisitions.

However, capital markets are somewhat weak and discretionary customer spending feeble. Near-term issues, emanating from a weaker economy, such as lower purchase sizes plague the company.

Execution was a major risk factor in the past, and, despite significant improvement, lingering concern may remain in this area. For instance, management had overbuilt its manufacturing capacity at its plants in Puerto Rico and UK.

The company faces formidable competition in each of its major product lines. Competition comes from globally well established contact lens manufacturers such as Johnson & Johnson (JNJ - Free Report) and Novartis (NVS - Free Report) . Finally, the valuation is fair with a balanced risk-reward trade-off.

We currently have a Neutral recommendation on Cooper. The stock currently retains a Zacks #2 Rank, which translates into a short-term “Buy” recommendation.

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