EUR 850.00 For Business Accounts Only

Morningstar | Cooper Sees Strong 1Q Performance Fueled by Surgical Business

We may slightly increase our fair value estimate in response to outpaced revenue growth of Cooper’s surgical business segment versus our projections. Cooper increased its 2019 EPS outlook from $11-30-$11.70 per share to $11.85-$12.18 per share. However, this revision was largely attributable to an abnormally low effective tax rate of 2.6% for the quarter, which was due to favorable internal restructuring and an audit settlement from the United Kingdom. We anticipate the tax rate will increase in 2020 back to the midteens. Though Cooper increased its revenue by 6% to $628.1 million, versus our 4% annual estimation during the quarter, operating margin dipped 200 basis points to 26%, which was primarily attributable to investments in selling and marketing in both its vision and surgical segments. We maintain our position that Cooper possesses a narrow moat in its vision segment due to its strong brand loyalty fostered by key account relationships, its cost advantages in manufacturing, and the switching costs due to consumer stickiness.

CooperVision’s 6% year-over-year growth in the quarter matched our expectations. CooperVision continues to outpace the soft contact lens market growth thanks largely to its growth in daily lenses. Cooper’s progression has now roughly tied it with Novartis’ Alcon for second-place market share. We expect Cooper to sustain this level of growth thanks to the market’s ongoing shift toward daily lenses, increasing incidence of myopia, and Cooper’s growing presence in Asia, where the company is underindexed versus peers. Within the daily use modality, Cooper’s silicone hydrogel franchises, Clariti (mass-market offering) and MyDay (premium offering), continue to grow and perform well. However, this rapid growth in daily silicones is putting pressure on the vision segment’s margin. But we expect that as Cooper increases its production capacity in response to sales improvements, this will improve.

CooperSurgical’s first-quarter revenue increased by 8% pro forma year over year, driven by a 10% increase in Paragard sales. Although management’s investment behind Paragard has led to improved growth for the franchise, we are skeptical this spending will translate into material impact on our long-term projections due to the competitiveness of similar products in the women’s health market. However, if Cooper can effectively capitalize on its marketing efforts and increase its market share in the IUD market, especially in the U.S. where Paragard is the only nonhormonal IUD option, we could increase our revenue outlook, potentially raising our fair value estimate.