Sometimes you’re willing to give up potentially large gains for a stock that keeps you up at night because the stock price remains stable. Cooper Companies Inc. (COO, Financial) offers this stability and beat the S&P 500 ETF Trust (TO SPY, Financial) (a proxy for the S&P 500) by 3.39% per year on average over the past 10 years:
About Cooper Companies
Based in San Ramone, Calif., the company calls itself an “industry leader in women’s vision and health”:
Source: Company investor presentation on January 11.
According to its 10-K for the fiscal year ended October 31, 2021, CooperVision develops, manufactures and markets soft contact lenses in a variety of advanced materials and optics. This includes its MiSight 1-day lens, which it calls the “first and only FDA-approved product indicated to slow the progression of myopia in children with treatment initiated between ages 8 and 12.”
CooperSurgical focuses on the health of women, babies and families, with a “diverse portfolio” of medical devices, fertility diagnostics and contraception.
For fiscal 2021, the company’s revenue was $2.92 billion:
- Cooper Vision: $2.15 billion.
- CooperSurgical: $771 million.
In an effort to bolster the surgical division, the company announced Nov. 10 that it plans to acquire Generate Life Sciences, “a leading private provider of donor eggs and sperm for fertility treatments, cryopreservation services of fertility and the storage of newborn stem cells (blood cord and umbilical tissue).The 1.6 billion dollar agreement was concluded on December 17.
The company sees several growth drivers for the surgical side, according to an investor presentation dated Jan. 11:
- Increase in maternal age.
- Better access to treatment.
- Increased patient awareness/comfort.
- Higher global disposable income.
Up to one in eight couples suffer from infertility worldwide.
On the contact lens side, he sees three main growth drivers:
- New developments and exchanges.
- A growing carrier base globally (currently one third of the world’s population is myopic – by 2050 this number is expected to reach half of the world’s population, 4.7 billion people).
- Higher net price.
For fiscal 2022, the company expects revenue to grow, in both segments, by 6% to 8%. He also expects earnings per share to increase to between $13.60 and $14 per share. This would represent an increase from 9.5% to 12.5%.
The 10-K lists three main competitors of CooperVision: Johnson & Johnson Vision Care Inc. (JNJ, Financial), Alcon Inc. (ALC, Financial) and Bausch Health Companies Inc. (BHC, Financial).
For CooperSurgical, it refers to Vitrolife (VITR), AbbVie (ABBV, Financial) and Hamilton Thorne (HTL).
Operating and net margins are above average for the medical device and instrument industry, indicating that Cooper has one or more competitive advantages.
The risks named in the 10-K include:
- Changes in global or regional business, political and economic conditions could adversely affect operating and financial results. These risks include Covid-19, trade barriers such as tariffs and inflation.
- Tax laws or their interpretation, particularly in the United Kingdom and the United States.
- Fluctuations in exchange rates and interest rates could reduce net sales and earnings.
- Floating rate debt: If rates rise, the company’s financial results could be negatively affected, or it could be limited in its ability to borrow additional funds.
- Cooper has grown and plans to continue to grow through acquisitions, so unsuccessful efforts could cause plenty of problems.
After some strong increases over the past decade, Coopers has slowed debt growth over the past three years:
Cooper’s debt has grown over the past decade, but apparently that borrowed capital was wisely allocated. As this chart shows, total assets grew faster than total liabilities:
Despite the growing debt, interest coverage is comfortable and around the same level as other companies in the industry.
It also suggests that the company’s free cash flow should be strong, and it is, after recovering from the sharp declines in fiscal 2019 and 2020:
Cooper receives high marks for profitability, but to some extent it is skewed by an asset transfer that led to a tax advantage and extremely high earnings per share – for just one year. The company explained in its 10-K for fiscal 2021 that diluted earnings increased 1,131% from a year earlier:
“As disclosed in note 6 to the consolidated financial statements, the Company completed an intra-group transfer of certain intellectual property and related assets from the CooperVision business to a subsidiary in the United Kingdom during the financial year ended 31 October 2021. Following the transfer, the Company recognized a deferred tax asset of $1,987.9 million, with a corresponding tax benefit, based on the fair value of the intangible assets transferred.
Still, the company has outstanding margins and the net margin is an industry leader.
Revenue has grown by less than 5% per year for the past three years, but as we saw above, this is expected to increase to 6% to 8% in fiscal 2022.
As Cooper beats the S&P 500 over 10 years, he has seen the S&P 500 catch up in fiscal year 2021:
GuruFocus displays Cooper’s feedback:
- One year: 5.64%
- Three years: 12.09%
- Five years: 16.01%
- 10 years: 18.26%.
Total annual returns:
- 2022 YTD: -8.05%
- 2021: 15.31%
- 2020: 13.08%
- 2019: 26.24%
- 2018: 16.81%
- 2017: 24.55%
Both sets of returns point to a business that has slowed over the past two years.
This dividend yield chart tells us all we need to know:
Cooper has paid an annual dividend of 6 cents per share since 2004.
Shareholders also did not receive rewards through significant share buybacks:
In its 10-K, the company said it repurchased 69,600 shares for $24.8 million in fiscal 2021, at an average price of $356.6 per share. The board authorized a repurchase program in 2012, and at the end of fiscal 2021 there was still approximately $334.8 million remaining.
GuruFocus provides this table of property information:
Chairman of the Board (and former President and CEO) Robert S. Weiss owns 63,798 shares, while current President and CEO Albert G. White held 41,430 shares at December 7.
While the overall valuation rating is hardly impressive, the price/earnings ratio is, as indicated by the dark green bar. Indeed, it is better than 91.35% of the 935 companies in the medical device and instrument industry.
The PEG ratio, calculated by dividing the price-to-earnings ratio by the five-year Ebitda growth rate, approximates the fair value of 1.
This is also the conclusion of the GF Value Line chart:
The discounted cash flow, or DCF, calculator arrives at an undervalued result, and deeply undervalued if we use the default 10-year growth rate. Even reducing the growth rate to a more conservative 10% provides a very high margin of safety.
Over the past few quarters, gurus sentiment has been evenly divided:
Eleven gurus held Cooper stock at the end of the third calendar quarter, including:
Al Gore(Businesses, Portfolio) of Generation Investment Management; he held the largest stake at 1,599,468 shares. They represented a 3.24% stake in Cooper and 2.75% of the fund’s assets. During the quarter, it reduced its stake by 1.29%.
Ron Baron(Trades, Portfolio) of Baron Funds, which held 240,241 shares after reducing its position by 0.13%.
Jim Simons(Businesses, Portfolio) or its successor(s) at Renaissance Technologies; it added a whopping 489.38% to end the third quarter with 132,598 shares.
Cooper Companies offers investors a stock price that fluctuates little and offers returns comparable to or better than the S&P 500. In addition, its free cash flow seems to be getting back on track and it has seen steady growth in Ebitda .
The company is either correctly valued or undervalued, depending on how you weigh the various metrics. Since hitting a high of $451.45 in September, it has come back to near $400.
Value investors may like the pullback, but stay away due to Cooper’s leverage. Income investors will completely ignore it; a dividend of 6 cents on a $400 stock is not attractive. On the other hand, growth investors and investors who don’t want to worry about stock prices may find the company attractive when the stock price recovers from its current slump.