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Morningstar | Cooper Posts Solid Growth in Both Vision and Surgical; Maintaining $230 FVE After 3Q Results

Cooper Companies executed well in the third quarter with strong growth in both its vision and surgical segments. Management updated fiscal 2018 guidance to account for greater-than-expected currency headwinds, slightly offset by excess tax benefits, but we do not expect a material change to our fair value estimate of $230 per share. In line with our expectations, CooperVision revenue increased 9% from last year in constant currency, and CooperSurgical revenue was up 6%. Further, the company continues to realize higher gross margin from Paragard and mix shift to higher-margin lenses. While trade-up trends have boosted the contact lens industry to post high- to mid-single-digit growth compared with historical rates of 3%-4%, we believe the strength across Cooper's complete portfolio of lenses highlights the firm's narrow economic moat, which is helping the firm win market share.

CooperVision growth was bolstered by revenue from Cooper's silicone hydrogel dailies, up 43% in constant currency. Favorable product mix improved gross margins by 40 basis points to 65.9%, slightly offset by increased rebate activity. Multifocals grew 10% in constant currency, but toric lenses tracked lower than expected with 9% growth. Geographic revenue trends were in line with our expectations, with Americas' up 8% in constant currency, showing continued improvement, in addition to EMEA up 6% and Asia up 14%. The firm reported capacity constraints in the third quarter with demand for its Biofinity (monthly) lenses higher than expected. On the call, management assured it has since added capacity, but we note that even small execution missteps can hinder Cooper while it competes with larger, efficient competitors. Accordingly, we were pleased to hear increased investment in its distribution centers and marketing to key accounts in addition to dedicated research and development for next generation products, which we believe is a necessary step to fortify its competitive advantage.

CooperSurgical's results fell in line with our expectations, posting 6% growth in constant currency, driven by 9% growth from Paragard. Gross margin improved over 90 basis points to 71.7% from last year, thanks to Paragard. As the firm previously announced, Cooper continues to increase sales and marketing efforts to capture Paragard's recent momentum, which has more than offset weakness in the transitioning genomics business. The additional cash generation from Paragard has allowed the firm to significantly pay down debt this quarter, after borrowing $1.4 billion for the acquisition in 2017. In addition to paying down debt, we expect the firm to continue using cash for small acquisitions in its surgical segment, which is increasingly focused on fertility.