Why Cooper Companies Could Have Major Upside

Cooper Companies Inc COO reports Q2 FY 2015 results on Thursday, June 4. Analysts are looking for $1.76 in EPS and $454 million in total revenue for the quarter. Prudena's models indicate that COO shares are appropriately valued, but a Monte Carlo simulation based on a residual earnings model does yield an asymmetric value distribution with significant upside potential.

Industry stability, Cooper's market leadership, and the upside potential has led analysts to rate COO very favorably.

Assuming a 7 percent required rate of return, Prudena's simple residual earnings model indicates that COO is appropriately valued at $182.97. The current price implies 3.68 percent long term residual earnings growth.

Given current fundamentals and short term estimates, this growth rate is well within the range of likely outcomes assuming that future results are in line with historical long term returns. Prudena's Monte Carlo simulation indicates that the most likely intrinsic value for COO shares is $192.87, which is 4.4 percent above the current price.

The value distribution from the Monte Carlo simulation suggests that Cooper has asymmetric upside potential. Prudena's valuation is based on long term earnings growth rates between 7.0 percent and 7.5 percent.

The Bull Case

The global soft contact lenses market is expected to grow at around 6 percent during the next five years. As the third largest manufacturer of soft contact lenses (with 22 percent market share), Cooper will benefit from this growth trend.

Further, the company has recently outpaced the market in terms of growth; CVI revenues grew 8 percent during 2014 as compared to 4 percent overall market growth. Management expects 9 percent revenue growth during 2015 versus the industry expectation of 6 percent-7 percent.

Cooper is taking share from competitors, and the company increased its market share from 16.5 percent in CY 2012 to 20.5 percent in CY 2014.

Cooper Companies has also been expanding its margins. Gross margin increased from 58 percent to 65 percent during 2010-2014; operating margin improved to 23.5 percent in 2014 vs 18 percent in 2010. The company expects its operating margin expansion to reach 26% by 2018. Further, Clairti and MyDay offerings of the company are gaining traction. Positive near term catalysts include the launch of MyDay and silicon hydrogel lenses, and a potential exclusive licensing deal with EP Global. Hydrogel lenses are witnessing adoption while EP’s new technology can fetch around $5 billion per annum in the Ophthalmic market.

The Bear Case

Cooper competes with well-established players in both of its divisions, including Johnson & Johnson, Novartis, Valeant, Boston Scientific and Medtronic. Shares are valued somewhat richly. The company trades at 23 times 2015 earnings while EPS is expected to grow at 14 percent p.a. for the next five years or so.

Short-term headwinds for the company include the effects of a strong dollar and capacity constraints. Charges related to recent acquisitions will continue to negatively impact earnings results going forward.

Conclusions

Cooper Companies is a market leader in a stable and mature industry. Analysts forecast mid to high single digit growth for the market as a whole, and Cooper is expected to continue its history of outperforming the market.

Despite this positive outlook, Prudena's models suggest that much of the likely upside is already built into the price. Analyst recommendation is generally positive to neutral, with most analysts rating the company buy or overweight.

In Thursday's earnings call, investors should pay attention to the impact of dollar appreciation, comments on demand in each product category, and discussion on the progression of integration and restructuring efforts.

About Prudena

Contributors: Soid Ahmad, Ryan Downie

NOTE: The Morning Monte is high-level, and any investment requires a deeper analysis than is presented here. The comments in the Morning Monte are intended to help guide your research and ground you in the fundamentals of the company. In no way should the comments in The Morning Monte be taken as advice to buy or sell a particular equity. Some of the statements are forward looking. As such, these statements are speculation--so beware! The comments represent the views of the author and are not necessarily the views of PRUDENA™.

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