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Jefferies is out with a strongly worded call on Cooper (NYSE:COO) initiating coverage with a Hold and $48 target saying that contrary to the Street, they do not consider COO a realistic near-term takeout candidate. They also believe the Street has adopted an overly optimistic stance on the U.S. Biofinity launch and COO's ability to spur a meaningful shift in the U.S. lens market toward daily disposables.

The firm thinks COO's operational challenges will prevent a takeout in the near term. Meanwhile, they believe COO is vulnerable to significant market share erosion, particularly in torics, because it lacks a widely available SiH lens. COO has struggled to ramp its manufacturing for the Biofinity SiH lens, resulting in a year-plus delay in the full-scale U.S. launch of the spheres. While COO says it is on track to meet its revised capacity goals for Biofinity spheres by H2:07 — a view the Street appears to accept wholeheartedly — the company has offered few metrics to support this claim, leaving room for a possible negative surprise.

In recent months, COO has stressed the growth opportunity associated with daily disposables, which presently account for less than 10% of the U.S. market. Although this opportunity seems attractive in theory, COO faces a tough marketing environment with JNJ and ACL, which have proven marketing expertise and a shared incentive to prevent a shift toward dailies. In addition, Jeffco believes the significant cost disadvantage to the patient associated with daily disposables will hinder adoption levels.

Firm considers the stock's risk/reward tradeoff to be unattractive at current levels and is waiting for a better entry point.

Notablecalls: COO is trading couple of bucks above Jeffco's $48 target and very near to the analyst median of $54. The logic behind the call looks sound and I suspect will generate some selling interest among current holders. Technically... the stock doesn't look too strong either.

Source: Jefferies Issues a Word of Caution On The Cooper Companies