Cooper Companies: In-line for '08, Positioned for Asian Growth

On Thursday, September 4 after-hours, Cooper Co.’s (COO) reported Q3 earnings of $0.39 per share or $17.9 million on $285.9 million vs. $0.18 per share or $8.1 million a year ago. Excluding restructuring costs, COO would have earned $0.67 per share or $31.5 million vs. $0.71 per share or $33.7 million a year ago. Analysts were expecting $0.65 per share on $285.2 million, beating earnings estimates and revenue targets. On September 5, shares closed at $34.01, down $2.16 or 6% on 1.84 million shares traded (over 3x the average daily volume).

I wear contact lenses and I had to see if they were from CooperVision, and they were! I didn’t even know that until I checked. I have to wear the toric lenses for astigmatism. When I visited the corporate site, it mentioned that 160 million people or 50% of the world’s population still need vision correction, 33 million people already wear contact lenses, and the rate of growth for lens wearers increases 4% per year. As more countries become industrialized, I expect the number of lens wearers to increase. If you had money and you wear glasses, you would get contact lenses. COO opened up a direct sales office in China in July 2007 and Hong Kong in March 2008, giving COO plenty of opportunity in the future.

Non-single-use sphere contact lenses grew 39% while the toric lens business grew 34% to $83.4 million and sales in the Americas increased 44% and sales in Europe increased 39%. CooperVision grew 15% to $243.2 million in revenue and CooperSurgical grew 7% to $42.7 million in revenue. CooperSurgical sales to hospitals increased 20% to $13.1 million, which represents 31% of the unit’s revenue. Total revenue grew 14%, led by both units. Currently, COO commands 16% of market share and is #2 in the U.S. after Johnson & Johnson (JNJ) and #2 in Europe after Ciba. In Asia, COO is #4, but I expect COO to take market share from JNJ, B&L and Ciba in the coming years in the Asian market.

COO reported free cash flow of $18.6 million and also reduced total debt by $13.3 million to $927.8 million, but long-term debt increased from $830 million to $890 million. In addition, cost of sales increased 23% to $130.7 million from $105.9 million. R&D, SG&A, and debt should be offset by COO’s revenue growth in its Proclear®, recently launched 2-week use Avaira™, and Biofinity® lines in the future.

The healthcare supplies industry outlook is neutral; however, COO’s outlook is positive, depending on the company’s ability to gain market share from competitors. The industry is typically recession-proof, but I do expect slow down in the U.S. market to be offset by growth in Europe and Asia. In vision care, a 6-8% growth level is sustainable and the reduced demand and affordability of laser vision correction in the U.S. should help boost contact lens sales.

Currently, 8 analysts publish recommendations on COO with 1 “Buy” rating, 6 “Hold” ratings, and 1 “Sell” rating. There are no new or reiterated ratings for COO, so expect them in the near future. COO’s short interest is relatively high at 19.5% of the float (43.69 million shares) with 16 days to cover.

Management also gave a more precise range for fiscal 2008’s earnings. Previously, COO expected to earn $2.10 - $2.35 per share on $1.06 - $1.10 billion, but now they expect to earn $2.18 - $2.24 per share on revenue of $1.08 billion - $1.10 billion. Analysts were expecting $2.28 per share on $1.09 billion in revenue, which remains in-line with full year expectations.

Technically, COO broke down from the 50-day MA after forming an ascending wedge. In the intermediate-term, notice how COO ‘perfectly fails’ the 200-day MA (4x). However, keep in mind that COO is making higher lows and finds support at $33.50. Regardless, the breakdown response after earnings is a warning sign that investors were not too happy with the results. A breakdown below $33 signals a continuation of a short-term downtrend and COO is likely to remain in a neutral-range for some time.

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Full Disclosure: Author wears CooperVision contact lenses, but does not hold a position in COO.

Comments

[Ranjit Thomas:]

Perhaps you didn't notice that the co. used an unusually low tax rate of 4% in their proforma figures for this quarter to arrive at a 67c profit. Using a normal 20% tax rate, EPS would have been 55c - a big miss from the 65c expectation. The company's earnings quality is poor with constant proforma exclusions for restructuring costs and the like. In fact, free cash flow over the last twelve months has been negative.

2008 Sep 09 08:28 AM