Cooper Companies Poised to Outperform

| About: The Cooper (COO)

We maintain our Outperform rating on eye-care and surgical products maker Cooper Companies Inc (NYSE:COO) following its healthy first-quarter fiscal 2011 results. Earnings for the quarter of 85 cents outshined the Zacks Consensus Estimate of 68 cents while profit roughly doubled year over year, powered by healthy growth across the board.

Revenues soared 13% year over year, boosted by double-digit growth across the California-based company’s CooperVision ((“CVI”)) eye-care division and CooperSurgical ((“CSI”)) surgical unit. Cooper remains successful in expanding margins on the back of higher sales and manufacturing efficiency gains at its CVI and CSI units.

Cooper lifted its revenue and earnings forecasts for fiscal 2011 based on improved visibility on its contact lens franchise. The company is committed to better operational execution while, on the financial side, is expected to deliver solid free cash flows in 2011. Moreover, Cooper is deploying a significant portion of its free cash flows to de-leverage its balance sheet and is expected to continue the same moving forward.

Cooper is a global medical products company specializing in a wide range of contact lenses for the vision correction market. The company is a leader in the high-margin toric lens market and benefits from strong demand for its Biofinity toric lenses. Cooper continues to gain market share in its CVI business.

The worldwide contact lens market is poised for accelerated growth. User preferences are shifting from low-feature commodity lenses to more expensive single-use and specialty lenses including the higher oxygen permeable lenses (silicone hydrogels). 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 market expansion.

However, Cooper faces significant competition across each of its product segments from well-established contact lens manufacturers such as Johnson & Johnson (NYSE:JNJ) and Novartis (NYSE:NVS).

Nevertheless, Cooper’s healthy margin is expected to be sustainable, driven by increased manufacturing capacity utilization. Our overall views are positive despite sluggishness in consumer spending on discretionary items, such as contact lenses. Our recommendation is backed by a Zacks #1 Rank, which translates into a short-term “Strong Buy” recommendation.