We downgrade our rating on The Cooper Companies Inc. (COO) to Neutral. Third-quarter fiscal 2011 earnings per share of $1.15 beat the Zacks Consensus Estimate of $1.08. Cooper reported sales of $351.4 million in the quarter, surpassing the Zacks Consensus Estimate of $332 million. Yet, there exists sluggishness in consumer confidence and expenditure for discretionary items, such as contact lenses.
Industry outlook has improved with an expectation of rising utilization in emerging nations and a higher proportion of sales of value-added lenses. Cooper proves to be a turnaround story based on rationalization of plants and better execution. It remains a leader in torics. Recent product launches may provide a boost in 2012. Cooper has reduced debt by using improved free cash flow, which opens up room for tuck-in acquisitions.
The launches of the Biofinity multifocal, in the U.S., in June 2011, and Biofinity toric in Japan are expected to provide a fillip to sales later in 2012. Cooper’s anticipated participation in these sizeable and growing markets suggests that growth may continue to be brisk. Continued momentum has enabled the company to again raise guidance for fiscal 2011.
However, capital markets are weak and discretionary consumer spending feeble. Near-term issues, emanating from a weak economy, such as lower purchase lot sizes and prolonged usage of lenses, plague the company. Also, on the macro-economic front, Johnson & Johnson (JNJ) and Novartis (NVS) pose fierce competition with their larger resources for R&D. Execution was a major risk factor. Despite significant improvement, lingering concern may remain in this area. In the end, we believe that valuation is fair with reasonable trade-off of risk and return.
COOPER COS (COO): Free Stock Analysis Report
JOHNSON & JOHNS (JNJ): Free Stock Analysis Report
NOVARTIS AG-ADR (NVS): Free Stock Analysis Report
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