Cooper Outperforms, Profit Zooms

Dec. 8.10 | About: The Cooper (COO)

Eye-care and surgical products maker Cooper Companies Inc. (COO) reported healthy fourth-quarter fiscal 2010 (ended October 31) results with adjusted earnings per share of $1.09 outdoing the Zacks Consensus Estimate of 86 cents and the year-ago earnings of 67 cents. For fiscal 2010, adjusted earnings per share of $3.10 also outperformed the Zacks Consensus Estimate of $2.87 while exceeding the year-ago earnings of $2.29.

Adjusted earnings exclude litigation settlement charges, restructuring costs and acquisition expenses. Net income for the quarter ballooned 60% year over year to $48.2 million (or $1.03 a share), boosted by double-digit growth across the company’s CooperVision (“CVI”) eye-care division and CooperSurgical (“CSI”) surgical unit coupled with higher margins.

The forecast-topping results accompanied by management’s upbeat guidance pushed up California-based Cooper’s shares to $56, a leap of $2.44 (or 4.56%) in after-hours trading on December 7.

Revenue Analysis
Revenues for the quarter shot up 11% year over year to $313.4 million, exceeding the Zacks Consensus Estimate of $297 million,driven by healthy growth across the board.For fiscal 2010, sales rose 7% year over year to $1,158.5 million, also surpassing the Zacks Consensus Estimate of $1,144 million.

The company continues to gain market share in its CVI business.Sales from the division in the quarter clambered 10% year over year to $263.2 million riding on higher sales from toric lenses (up 14%), single-use sphere lenses (up 9%) and non-single-use sphere lenses (up 10%), partly ebbed by the decline in multifocal lenses (down 2%). Geographically, revenues from Americas and Asia-Pacific rose 20% and 6%, respectively, but remained stable in EMEA.

The CSI division had a good quarter with revenues surging 14% year over year to $50.1 million boosted by higher sales across all product categories. Revenues from surgical procedures jumped 21% to $16.7 million in the quarter.

Margin Trends
Copper remains successful in expanding margins with gross margin improving to 60% in the quarter from 56% a year-ago, supported by higher revenues and manufacturing efficiency gains at its CVI and CSI units. Higher gross margin helped the company to improve operating margin in the quarter which rose to 20% from 15% a year-ago.

Financial Condition
Cooper exited fiscal 2010 with cash and cash equivalents of roughly $3.6 million, down 9% year over year. The company remains committed to de-leveraging its balance sheet as total debt declined by $35.5 million in the quarter to $611.1 million (down 22% year over year).

Cooper generated $64.6 million of cash from operation in the quarter and spent $32.8 million on capital expenditures, resulting in free cash flows of $31.8 million (down 46% year over year). For fiscal 2010, free cash flow s surged 50% year over year to $193.9 million.

Outlook & Recommendation
Cooper has issued a buoyant outlook for fiscal 2011 with opportunities for sustained top line and margin expansion. The company expectsadjusted earnings per share for the year in the range of $3.30 to $3.50, which compares favorably with the current Zacks Consensus Estimate of $3.25. Revenues for the year are pegged between $1.25 billion to $1.28 billion, which is also above the current Zacks Consensus Estimate of $1.21 billion.

Revenues for the CVI and CSI divisions are expected in the range of $1,055 million to $1,075 million and $195 million to $205 million, respectively. Free cash flow has been forecasted in the range of $160 million to $190 million.

Cooper is a global medical products company specializing in a wide range of contact lenses for the vision correction market. The worldwide contact lens market is poised for accelerated growth. Higher prices, international expansion and increase in contact lens utilization rates in developed markets (given the declining drop-out rates) will act as tailwinds for this market expansion.

However, Cooper faces significant competition across each of its product segments from well-established contact lens manufacturers such as Johnson & Johnson (JNJ) and Novartis (NVS). Depressed levels of consumer spending have exacerbated competitive pressures on the company.

Nevertheless, Cooper’s healthy margin would be sustainable driven by increased manufacturing capacity utilization and further leverage of the high-volume plants in the U.K. and Puerto Rico. We currently have an Outperform recommendation on Copper, supported by a short-term Zacks #2 Rank (Buy).