Wednesday, June 06, 2007

Cooper (NYSE:COO): Color on earnings

- Couple of firms out with mostly defensive comments on The Cooper Companies (NYSE:COO) after the co released FQ2 results that were way below analyst expectations:

- Citigroup notes that despite a top-line that grew 7% year-over- year, expenses were considerably ahead of their thinking leading to the EPS shortfall. Cooper held share in the quarter growing 4% ahead of modest worldwide contact lens market growth of 3%. Cooper continues to benefit from the shift to daily disposable use with the market expanding to 11% in the quarter (vs. a 5% decline in spherical lenses ex-single use).

While management reiterated prior guidance of $2.55-$2.75 (incl. options expense), Citi notes that there are various near-term challenges to the company's ability to execute and meet guidance. They believe the company will likely need to continue its increased sales efforts to promote new products and drive the shift to daily disposables. Nonetheless, given the continued strength in the daily disposable market the firm is raising F2007 revenue by $5m to $926m; however the quarterly miss drives EPS down $0.17 to $2.34. FIrm ups their target price to $55 from the $48 prior as calendar year 2008 EPS estimate rises to $3.27 from $3.23 prior. Maintains Hold.

- Goldman Sachs maintains their Buy rating on COO saying that despite mixed results for the quarter, there were plenty of developments to suggest that Cooper remains on track to drive increased profitability in FY 2008. Although margins were compressed during the quarter due to upfront spending to support the Biofinity launch, with a solid outlook for revenue growth, the story is attractive, particularly with the prospect of significant operating leverage in 2008 and beyond. As such, they are inclined to overlook perceived concerns from F2Q results with a eye towards greater earnings growth going forward.GSCO ups their tgt to $59 from $55.

- Baird notes FQ2 played out much the same way as other recent quarters, with CVI adjusted grossmargin continuing to move lower and SG&A expenses as a percentage of sales (even after excluding non-recurring items) continuing to move higher.

While the firm believes this could represent the low point for COO as it relates to earnings performance (management stressed on last night's call that a number of product development and product launch costs had been front-end loaded), they also believe management's outlook for ~30% EPS growth over H2-07 vs. what has now been a 15% EPS decline in H1-07 could prove difficult to achieve. To that end, they are lowering FY'07 adjusted-EPS projection to $2.24, well below management's current $2.55-$2.70 range. Additionally, the firm is taking their FY'08 EPS projection down to $2.95 from $3.07 previously (management has not provided FY'08 guidance).

Baird says their $52 price target represents a multiple of justover 16x NTM +1 EPS projection of $3.17 (includes FQ3-08 through FQ2-09). Over the last five years, COO has traded in an NTM multiple range of 11-24, and they believe continued profitability pressures are likely to limit upside to numbers and hence the multiple upon which these shares trade over the next several quarters, although take-out potential likely limits downside risk to the upper $40s/low $50s as well.

Notablecalls: COO is going to get hit today for sure. Yet, given the fairly sizable short interest and upcoming catalysts, the stock looks like a bounce candidate. Note that the problems with EYE's MoisturePlus product (and also BOL's equivalent) are likely to drive daily disposable lens use in the near-term. That's certainly a positive for COO.

On the valuation side, I'm going to go with Baird's $2.95 number for FY08, suggesting downside risk to upper $40s. The stock ended around $51 and change in after hours action.

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