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Cooper Companies: A Strong Buy

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Rising earnings estimates on the back of strong third quarter fiscal 2012 results helped Cooper Companies (COO - Free Report) achieve a Zacks #1 Rank (Strong Buy) on September 11. Moreover, this contact lens and women’s health focused company has delivered positive earnings surprises in six of the last seven quarters with an average beat of 10.9%.  

With a strong one-year return of 28.9%, an upgraded fiscal 2012 guidance and a history of beating quarterly earnings estimates, this stock offers an attractive investment opportunity.

The Rank Driver

Several factors such as a strong third quarter, raised guidance, margin expansion, acquisitions expanding the product line and geographical reach as well as share buybacks and an attractive valuation are driving the stock.

Cooper reported its third quarter fiscal 2012 results on September 6, 2012. Adjusted earnings per share (“EPS”) came in at $1.45, reflecting an earnings surprise of 12.4% and a 26.4% year-over-year climb.

The company reported 8% year-over-year revenue growth (up 9% at constant exchange rate or CER and before acquisitions) grossing $378.2 million during the quarter. With this the company surpassed the Zacks Consensus Estimate of $368 million. The upside was primarily on the back of 5% growth in CooperVision revenue to $314.2 million.

The company’s women’s health franchise, CooperSurgical, recorded 20% growth to $64 million, of which $5.6 million came from the acquisition of Origio in July. Denmark-based Origio develops, manufactures and distributes highly specialized products targeting in-vitro fertilization (“IVF”) treatment. Excluding acquisitions, CooperSurgical grew 6% during the quarter.

Improved margins in both the divisions led to a 170 basis point year-over-year expansion in adjusted gross margin to 63.5% during the quarter. In spite of higher selling, general and administrative (up 4.6% to $139.8 million, adjusted) and research and development (up 12.2% to $13.2 million) expenses, adjusted operating margin (excluding expenses associated with the Origio deal) increased 270 basis points to 21.5%.

Cooper is confident of sustaining the improving margin trend. There is further scope for margin upside with the elimination of the silicone hydrogel (a major product material) royalty as patents expire in September 2014 in the US and in March 2016 in the rest of the world. In addition, the company is targeting manufacturing cost reductions, and improving capacity utilization and yields that are likely to drive margin.   

Cooper continued with its share repurchase program. The company repurchased 321,000 shares for $25 million during the quarter taking year-to-date repurchases to 984,000 shares for $71.1 million.

Guidance Raised

Cooper raised its revenue guidance for fiscal 2012 to $1,439−$1,449 million (previous guidance was $1,400−$1,440 million) comprising $1,186−$1,191 million ($1,175−$1,205 million) in revenues from CooperVision and $253−$258 million ($225−$235 million) from CooperSurgical. While the outlook for CooperVision was narrowed, an upped guidance for CooperSurgical takes into account the Orogio acquisition.   

Given the strong operating results in the third quarter, the company increased its adjusted EPS guidance for fiscal 2012 to $5.19−$5.24 ($4.90−$5.15). Free cash flow is now projected in the range of $210−$230 million ($200−$230 million) for the fiscal.  

Estimates Inch Up

Cooper’s solid performance in the third quarter and the raised fiscal 2012 guidance encouraged 7 upward estimate revisions in as many days. With this, the Zacks Consensus Estimate for fiscal 2012 climbed 3.6% to $5.22 per share. The current estimate implies year-over-year growth of 16.1%.

For fiscal 2013, 8 out of 9 estimates were revised higher over the same time frame, raising the Zacks Consensus Estimate by 3.8% to $5.79 per share, implying year-over-year growth of 10.9%.

Reasonable Valuation

Valuation of Cooper looks reasonable compared to its peers by most metrics. Based on 2012 earnings estimates, the company is trading at a price-to-earnings (P/E) of 18.11x, a nominal premium to the peer group average of 18.04x. Moreover, the price-to-book of 2.17x is at a 9.2% discount to the peer group average of 2.39x.

Valuation looks attractive with respect to the return-on-investment (ROI) ratio as well. The ROI ratio of the company stood at 10.7% compared with 9.9% of the peer group average.

About the Company

Headquartered in Pleasanton, California, Cooper is a global medical products company specializing in a wide range of contact lenses and also targets the women’s health market. With a market capitalization of $4.66 billion, the company has a wide portfolio of spherical, toric and multifocal contact lenses using phosphorylcholine technology and silicone hydrogel Aquaform technology. Within the $7 billion soft contact lens industry, Cooper is estimated to have approximately 30% share in the high growth specialty lens categories. Besides, the women’s health segment was strengthened by the acquisition of Origion. However, these businesses are highly competitive with the presence of well-capitalized players such as Johnson and Johnson (JNJ - Free Report) and CIBA Vision, a unit of Novartis AG (NVS - Free Report) .

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