We established a position in The Cooper Companies, Inc. (COO, Financial) during the quarter. Cooper's primary business is manufacturing contact lenses, and it also has a relatively small unit focused on women's health products. There are several characteristics of the contact lens market that we find attractive. There are just four global players that account for the large bulk of the industry's sales, barriers to entry are high, and pricing trends are stable. The industry has grown at a mid-single digit rate for the past several years, and we believe that several developments should cause this growth rate to accelerate going forward. These include the widespread adoption of Silicon Hydrogel lenses, which provide a more comfortable user experience; recent technological advances that have led to lenses that can address a wider variety of vision deficiencies; the increasing conversion of bi-weekly contact users to daily-use lenses (which results in higher revenues for the manufacturer); and, the ongoing growth of the middle classes in emerging markets, which allows new entrants into the contact market.
Cooper is the third largest lens manufacturer with approximately 20% market share. The company has grown its share in recent years by introducing technologically superior products, particularly in the fast- growing Silicon Hydrogel market segment. We believe that Cooper can continue to grow at an above-market rate by further penetrating the global market with its superior products and by converting existing users from bi- weekly to daily contacts. In addition, we believe that Cooper should be able to expand its operating margins at a faster rate than revenues, as its Silicon Hydrogel lenses carry meaningfully higher gross margins than its legacy products, and sales growth will allow the company to leverage its fixed overheard. We believe Cooper will be able to grow its earnings per share at a high-teens rate for the next several years.
From Baron Funds' first quarter 2014 letter to investors.
