The Cooper Cooper Companies (NASDAQ:COO) is a medical device manufacturer with a market cap of just under $14 billion. Though many medical device businesses have fared well over the last year, Cooper has lost nearly 35 percent of its value. Is The Cooper Companies stock a bargain today, or has the market assigned it a lower price that better reflects its intrinsic value?
Cooper’s Two Large Business Units
To fully understand Cooper, it’s important to first take a look at its two large business units, CooperVision and CooperSurgical. CooperVision, which accounts for roughly two-thirds of Cooper’s total revenues, is one of the world’s largest makers of contact lenses.
CooperSurgical, accounting for the remaining third of the business’s total revenue, is a medical device and consumables maker with a focus on women’s health and fertility. Though a seemingly unusual pairing, these two business units give Cooper as a whole a diversified portfolio that has proven quite successful.
Cooper Revenues Up 19x In a Row
Despite weakening investor sentiment, Cooper has managed to keep its revenue growth up for 19 consecutive quarters. This trend continued in the business’s fiscal Q3, which saw revenues rise 6 percent year-over-year to $1.06 billion. CooperVision’s revenue growth rate mirrored the overall growth at 6 percent, though it’s worth noting that revenues from Europe, the Middle East and Africa handily outpaced that rate and grew at 14 percent compared to the prior year. CooperSurgical, meanwhile, delivered a lower growth rate of 4 percent.
Where the business hasn’t fared quite as well, however, is on its bottom line. EPS for the most recently reported quarter totaled $0.49, a 6 percent reduction from the year-ago quarter. This was also the second quarter in which Cooper’s earnings decreased, a worrying trend for a business whose net margins have historically hovered in the high single-digit to low double-digit range. Adjusted EPS, however, rose 15 percent to $1.10.
Another positive area in the Q3 earnings report was the $261.5 million in cash from operations, which resulted in free cash flow of $164.6 million. This strong cash flow enabled Cooper to repurchase $52.1 million worth of its own shares during the quarter, leaving $163.6 million in remaining buyback authorizations.
Cooper’s Growth Outlook
Cooper’s management is projecting quite low growth rates in fiscal Q4, with revenue expected to increase by 2-4 percent compared to the year-ago quarter and adjusted EPS closely mirroring what the business delivered in Q3. For the full fiscal year, revenue is expected to come in at $4.08 billion to $4.10 billion, representing a growth rate of 4-4.5 percent. Adjusted EPS, meanwhile, is projected at $4.08-$4.12 for the full year.
Looking at the coming 3-5 years, though, analysts expect to see Cooper’s earnings per share rise at an annualized rate of about 10 percent per year. Though perhaps not a massive growth rate, this kind of steady and sustained earnings growth can exert substantial upward pressure on share prices over long periods of time. Free cash flow is also expected to increase rapidly in the near future, with a forward 12-month projected growth rate of about 28 percent.
COO’s Current Valuation
Even after losing a little over a third of its value in the last year, COO is still priced at 34.3 times earnings, 3.5 times sales and 1.7 times book value. The stock’s price-to-operating cash-flow ratio is similarly high at 34.0. It’s worth noting that the current P/E ratio is about the lowest premium on earnings that Cooper has commanded since mid-2023. Though this doesn’t inherently mean that the stock is undervalued, it does show that COO can sustain what may seem to be fairly high P/E ratios over multi-year periods.
COO’s selloff has also brought it down to well below the average analyst price target of $83.19. From the stock’s current price of $69.75, COO would return a bit over 19 percent if it returns to the consensus price target set by analysts. The lowest standing price target for the stock is also $64, potentially implying that there could be more upside than downside in The Cooper Companies at the moment. Even so, analyst ratings are roughly split with seven buy ratings, six hold ratings and one sell rating.
Can Cooper Bounce Back?
One of the strongest tailwinds Cooper is likely to have is the general growth of the contact lens market, a major positive for CooperVision. Through 2030, annual growth rates in this market are expected to average nearly 9 percent, eventually bringing the global market for contact lenses to an estimated size of $33.8 billion. Given that CooperVision is an established market leader and that the contact lens business accounts for the majority of Cooper’s overall revenues, this growth trend could keep steady upward pressure on Cooper’s top line for several years to come.
Another positive for Cooper is the fact that its valuation has become far more reasonable than it was as recently as two years ago. While a multiple of almost 35 times earnings is still a premium, Cooper has shown that it can support fairly high P/E ratios. Given the steady earnings growth Cooper is expected to deliver over the coming several years, it’s quite likely that there’s room for shares to rise without becoming overvalued.
With all of this said, low net margins and somewhat slow revenue growth ahead could both keep COO from suddenly regaining the ground it has lost over the last 12 months. Barring an unexpected earnings surprise or a sudden surge in revenue growth, investors likely won’t see drastic upward price movement from Cooper in the immediate future.
At the end of the day, The Cooper Companies may not be a massive bargain. The stock, however, seems to have fallen into a price range that could leave room for gradual compounding returns. As such, COO may be a moderate buy for long-term investors looking for sustainable growth. Cooper’s ongoing share buyback program will also likely continue to support higher share prices if management keeps allocating the cash generated by the business to repurchasing shares.
The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.