2023-12-11 17:18:33 ET
Summary
- The Cooper Companies, Inc. has gradually grown its medical device business, but shares still trade at a premium to the market.
- The company's core segment, CooperVision, has shown strong execution and market share growth.
- Despite a lower valuation, the overall valuations of Cooper Companies have become more compelling, but a better entry point is desired.
In the spring of 2022, I urged for some caution in the case of The Cooper Companies, Inc. ( COO ) . The company had aggressively grown the surgical business after it announced a second larger deal in this space, yet shares traded stagnant at high, and more than fair levels, at the time.
Ever since, the company has gradually grown the business, although it has incurred some margin pressure, which in combination with a falling share price has resulted in quite some earnings multiple compression. This is positive, but shares still trade at a premium to the market, one which I cannot fully justify here.
Moving Beyond Vision
Cooper is a long-term medical device business which generated about $2.5 billion in sales in 2020. About three quarters of its sales were generated from the core vision segment, called CooperVision, complemented by a women's health business which is named CooperSurgical.
CooperVision is a dominant force in a +$10 billion global market for soft lenses in which it competes against the likes of Alcon and Johnson & Johnson ( JNJ ) , in a market which really appears to be kind of oligopolistic, with a few big players being active, with stringent regulatory requirements and high initial capital expenditures effectively prohibiting companies from entering and competing in this space. Strong execution meant that Cooper over time has grown its market share by 25%. CooperSurgical is a medical device and fertility business, largely focused on women.
The company posted $2.65 billion in sales in 2019, a number which fell to $2.43 billion in 2020 (for obvious reasons) and subsequently rebounded in 2021. The company reported (adjusted) earnings of $13.30 per share that year. Based on these achievements, shares traded comfortably above the $400 mark in the fall of 2021, granting the business a $22 billion valuation (including about a billion in net debt).
The thesis changed slightly following a $1.6 billion deal to acquire Generate Life Science, a privately held provider of donor eggs and sperm for fertility treatments, adding about $250 million in sales to CooperSurgical, as the deal pushed up leverage to mid-2s.
In the spring of 2022, shares traded at the $400 mark in response to the 2021 results, with revenues up 20% to $2.92 billion, and adjusted earnings coming in at $13.24 per share. For 2023, the company guided for sales to advance to a midpoint of $3.06 billion, and earnings seen between $13.60 and $14.00 per share, as this excludes a contribution from Generate.
The company furthermore acquired Cook Medical Reproductive Health Business, a manufacturer of minimally invasive medical equipment, in an $875 million deal in February 2022. This deal was set to add $158 million in profitable sales, with earnings accretion seen at $0.60 per share.
With pro forma net debt at $3.7 billion, leverage ratios came in around 3 times, all while full year sales would rise to $3.45 billion, pro forma for both these deals, with earnings seen around $14.50 per share. With 28 times adjusted earnings multiple, a 3 times leverage ratio and still adjusted earnings being reported, it was clear that expectations were still high, as not all investors were buying into the strategy of buying growth in the women's health business.
Expectations Come Down
A $400 stock in the spring of 2022 had fallen to the $250 mark in the fall of that year, actually recovered to the $400 mark over the summer of 2023, fell to $300 this fall and now trades at $335. This still marks about 20% losses over a one and a half year time window, as expectations were still high in the spring of 2022.
In December 2022, Cooper posted its 2022 results with revenues up 13% to $3.31 billion, slightly missing the pro forma sales numbers, but this is largely due to the fact that the Cook Medial deal had not yet closed. A $12.42 adjusted earnings per share number did fall short compared to expectations, driven by margin pressure across the board.
The 2023 guidance was not comforting either, with revenues of $3.455-$3.515 billion being in line with the pro forma numbers at the time of the deal announcement. Moreover, adjusted earnings were seen flattish between $12.30 and $12.60 per share. Important to note is that the guidance did not yet include the contribution of Cook Medical, with net debt reported at a manageable $2.6 billion.
2023 - Mixed
Following the release of the first quarter results, Cooper hiked the full-year guidance, now broadly seeing sales between $3.50 and $3.55 billion, with adjusted earnings seen between $12.60 and $12.90 per share. The guidance was hiked again following the release of the second quarter results, albeit much less pronounced, with the earnings guidance hiked by six cents.
The guidance was hiked again following the release of the third quarter results in August, with full year revenues now largely seen between $3.58 and $3.60 billion, and adjusted earnings seen between $12.72 and $12.90 per share. Net debt has been reduced to less than $2.5 billion ahead of the Cook deal, with deleveraging needed as I peg EBITDA only at around three-quarters of a billion here, with earnings held back by higher interest expenses.
In November, Copper announced on the closing of the acquisition of certain select Cook Medical assets, focused on obstetrics, doppler monitoring and gynecology surgery. The $300 million deal consists out of a $200 million consideration due at closing, with the remaining hundred million due to be paid across two equal installments in the coming two years.
These assets will contribute some $56 million in sales, about 1.5% to pro forma sales, set to boost non-GAAP earnings by twenty cents per share. The fertility products, part of the original deal, were left out of the consideration.
This guidance comes on top of the already provided guidance for fiscal year 2024 (even as 2023 has not ended yet) with sales next year seen between $3.81 and $3.88 billion, and adjusted earnings seen between $13.60 and $14.00 per share.
No Clear Sight
With the adjustments not relating to stock-based compensation expenses, a $335 stock now trades at 24 times forward adjusted earnings, still not a low multiple, but definitely lower than we have seen for The Cooper Companies, Inc. in recent years.
The 50 million shares now grant the business a sub $17 billion equity valuation, or about $19 billion enterprise valuation, equal to a 5 times sales multiple, being much more in line with the wider medical device industry.
All in all, The Cooper Companies, Inc.'s overall valuations have become a bit more compelling, the company is still somewhat leveraged. Quite frankly, I require a better entry point (like we have seen before). I might dip my toes into the water if and only when shares trade with a $2 handle.
For further details see:
The Cooper Companies: Not In My Sight Yet