2023-03-07 15:42:08 ET
Summary
- COO delivered solid 1Q23 results, exceeding revenue and profit expectations with sales of $858.5 million, driven by strong results in CVI and CSI.
- COO increased its guidance for the year with organic growth projected to be 7-9% and EPS expected to be $12.60 to $12.90, up from the previous $12.30 to $12.60.
- CVI's success is evidenced by the fact that the company has grown organically by double digits for eight consecutive quarters running.
Investment thesis
The Cooper Companies (COO) delivered solid 1Q23 results, surpassing revenue and profit expectations. Especially noteworthy, positive updates were made to FY23 guidance (the primary focus for the earnings, in my opinion). In 1Q23, sales of $858.5 million were driven by solid results in CVI and CSI. Improved gross margin contributed heavily to the 1Q23 EPS of $2.90. As a result of 1Q23's strong performance, management has increased guidance for the year: organic growth is expected to be 7 to 9%, up from the previous 6 to 8%, and EPS is expected to be $12.60 to $12.90, up from the previous $12.30 to 12.60. Even with the new guidance, I still think there's room for growth. The primary reason is that I believe COO will gain significantly more from FX tailwinds this year than was previously anticipated (the revised guide only accounts for a $0.05 FX tailwind). Another thing to highlight is that COO isn't experiencing the same weak market conditions that competitors have been emphasizing as of late, though it did note that December was a slower month and January, which is part of 1Q23, was a stronger month. From these anecdotal comments, it appears that COO may be gaining ground in the market.
Overall, in my opinion, the contact lens industry as a whole remains strong, and will continue to grow at a steady rate for the foreseeable future thanks to factors such as upgrading to a better product and exposure to fast-growing end markets like myopia management. Readers should know that the industry is a rare oligopoly in the MedTech sector, with high entry barriers, long product cycles, and devoted customers, as such COO sits in a rather sweet spot, I think. On top of COO being positioned in an industry with high barriers to entry, with the expected strength going into FY23 and long-term tailwinds, I recommend taking a small long position in COO.
Guidance is the focus
The highlight, in my opinion, was the company's revised guidance, and many shareholders will be watching to see if COO can meet or exceed these expectations. The market has certainly reacted positively to the positive news, sending the stock price soaring by 10% post the earnings. The new guidance for FY23 EPS is between $12.60 and $12.90. There is no denying the good news here, but I can't help but feel conflicted. This range now bakes in higher interest expense (due to higher rate hike expectations) and modest FX tailwinds, so I'm pleased to see the numbers trending upwards. When broken down, however, it appears that the strong 1Q23 was responsible for the bulk of the FY23 revision, with the remainder attributable to some operational enhancements, gross margin enhancements, better FX, and lower taxes. In this light, it appears that the only structural reasons for a revision was operational improvement and some gross margin expansion, with FX and taxes being one-offs that may or may not materialize. Because of this, I am still of a cautiously optimistic view on this new set of guidance (more positive than negative).
CVI in focus
CVI's success is evidenced by the fact that the company has grown organically by double digits for eight consecutive quarters running, thanks in large part to the success of its SiHy Share Gains and Myopia Management Products. It's crucial to note that this organic growth was experienced across the board. COO reported robust expansion across the board. The Americas grew organically by 9%, while EMEA grew by 12%, and the Asia-Pacific region grew by 10%. MyDay was largely responsible for the 17% organic growth in daily SiHy's. I take this as a strong indicator of the positive reception the MyDay brand has received from the marketplace and its target audience. Excitingly, MyDay Energys began a nationwide rollout in the United States at a 20% premium. This nationwide launch has a price premium, so if it gains traction, we could see higher overall growth from the CVI segment as it benefits from a mix shift in price. Separately, SiHy's monthly Biofinity and biweekly Avaira Vitality both experienced 9% organic growth. Not to mention, interest in Biofinity has not waned. COO also announced a 2% increase in prices for its organic products, which is in line with the industry average.
Myopia management contributed 32% growth in revenues to $25 million, and it is still on track to earn $120-130 million in FY23. As COO continues to increase MiSight's availability in a wide variety of key accounts, actively launch an expanded parameter range, and make progress in R&D, I expect this growth to be sustainable for the foreseeable future. The management team provided a positive remark stating that as users become more familiar with myopia management, the demand for fittings has increased. Additionally, the COO has observed a beneficial halo effect among MiSight customers, as they are using other COO lenses more quickly than before.
Conclusion
The strong 1Q23 results and upwardly revised guidance from COO indicate a positive outlook for the company. With increased organic growth projections and higher EPS expected, I believe COO is well-positioned to benefit from the favorable tailwinds in the contact lens industry, particularly in the areas of myopia management and SiHy share gains. While there are some concerns about the sustainability of the growth trajectory and the impact of interest rates and FX tailwinds, my overall outlook for COO remains cautiously optimistic. Therefore, based on the company's performance, market position, and growth potential, I recommend a small long position in COO.
For further details see:
The Cooper Companies: Cautiously Optimistic For FY23