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Is Cooper Companies' Upward Trend Likely to Go On?

March 25, 2014 | About:

A Delaware corporation organized in 1980, Cooper Companies Inc. (COOP) is a global medical devices company dedicated to being A Quality of Life Company (TM) with a focus on delivering shareholder value. It operates through two business units: CooperVision, Inc (CV) and CooperSurgical, Inc (CS). They compete on the basis of product quality and differentiation, technological benefit, service and reliability. CS focuses on developing and manufacturing diagnostic and surgical products for gynecologists and obstetricians. Its customers are healthcare professionals and institutions providing care to and for women. On the other hand, CV is engaged in the development, manufacturing and marketing of monthly, two-week and single-use contact lenses, including advanced materials and optics. It is one of the world's top four developers and manufacturers of contact lenses. Approximately, 58 percent of CV's sales are international. CS' sales account for 15 percent of total sales.

In the last month, Cooper Companies has been enjoying rising earnings estimates, riding on strong fiscal 2014 first-quarter results and a promising guidance for fiscal 2014. The global medical device company has delivered positive earnings surprises in 3 of the last 4 quarters. It also reported an improvement of 200 basis points -each in the gross and operating margins for the quarter. Moreover, in the past 30 days it saw five upward estimate revisions for fiscal 2014 with no downward revision over the same time frame. Shares rose up by 7.2 percent in the last month and while this trend may have just begun, is it likely to keep going on? Let's take a closer look at the company and find out.

The industry

Cooper faces formidable competition in each of its major product lines from well established contact lens manufacturers. Also, the company was a laggard in bringing silicone hydrogel lenses to the market and some automatically discard it for not being an innovation leader. However, Cooper is a leader in the high-margin toric lenses market. Unlike some of its competitors who offer toric lenses in a limited number of designs, this company offers multiple designs of them across a wide range of parameters. And even having its global market shares trailing the leaders Johnson and Johnson and Novartis, in the recent past Cooper commanded almost one-third market share in rapidly growing specialty lenses, multifocal lenses and torics. Furthermore, the firm continued to garner market share by growing two to three -about 12 percent- times its market growth share.

Cooper has also adopted better manufacturing techniques which have helped the company reduce unit costs for contact lenses. Execution was a major risk in the past, and the company has made some significant improvements in this regard. Although it had overbuilt its manufacturing capacity plants in Puerto Rico and U.K., it has now rationalized manufacturing operations. New products will be introduced which will further improve capacity utilization and operating margins, thanks to manufacturing efficiency and a product mix in favor of higher-margin silicone hydrogel lenses.

The markets

All around the world, and especially in the European nations, the markets continue to be negatively affected by uncertainty. A major headwind for the company is posed by fluctuations in foreign exchange rates. As contact lenses are a discretionary purchase mostly, on a situation like that they are often deferred by cash-strapped consumers. Short-term issues like the near-term macro softness and persistent high unemployment continue to afflict this company. Also, depressed levels of consumer spending exacerbate the competitive pressure on Cooper.

However, the outlook for contact lens industry is favorable. The Asia-Pacific region is likely to be the fastest growing of the major territories and portrays great potential, even for Cooper who is holding currently the smallest presence of four big contact lenses manufacturers. Nevertheless, manufacturers like this company are banking on the growth of the international markets as well as on the shifting preferences of consumers -from low feature commodity lenses to more expensive single-use and specialty ones. Also, a trade up to value added lenses -like silicone hydrogel or one-day lenses- is a major avenue for growth. Both sales and profit will benefit exponentially from a trade up to 1-day disposable lenses. On top of that, last October Cooper unveiled a new contact lens brand as an extension to its popular Biofinity silicone hydrogel technology. This lens is suitable for a greater number of monthly replacement lens patients including those who suffer from significant hyperopia (far sightedness) and myopia (short sightedness)

The numbers

Cooper is currently trading at a discount price compared to the industry and has higher returns on equity than it as well, which makes it an interesting option to consider when thinking of investing. Its expected earnings growth is pegged higher at 14.3 percent as well, compared to industry growth of 13.5 percent. All of this suggets this stock's upward trend is likely to continue. Also, there have been rumors that Valeant Pharmaceuticals (:::) is actively looking to consolidate the vision market, and Cooper is an attractive target. A merger between these two companies would combine the third and fourth largest player by global market share and create significant cost synergies.

 

Cooper Companies Inc. (COO)

Industry Median

West Pharmaceutical Services (WST)

P/E

23.10

23.60

28.70

Market Capital

6.59 B

-

3.13 B

ROE

12.32

8.17

 

Currently, gurus Ray Dalio, Steve Mendel, Richard Peny, Joel Greenblatt and George Soros hold a stake at this company.

Disclosure: Damian Illia holds no position in any stocks mentioned

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website


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