The Cooper Companies: Still An Expensive Place (NASDAQ:COO)

Towards the end of last year, I concluded that shares of The Cooper Companies, Inc. (COO) were not yet getting in my sight.

The company was pursuing M&A to grow its CooperSurgical business, to create a better balance between Vision and Medical products. While this looked nice, it was a premium valuation (and some leverage taken on) which made me cautious, even as sales kept growing at a decent clip.

Fast forwarding in time, shares have seen a rather stagnant performance amidst a resilient first-half operating performance in 2024, and amidst continued bolt-on M&A efforts. Nonetheless, it is the premium valuations which withhold me from getting involved here.

Cooper – More Than Vision

Cooper is a medical device business that operates two distinctive business lines. The company’s core operation is CooperVision, the company’s soft lens business, which competes against the likes of Alcon and Johnson & Johnson in a $10 billion global oligopolistic market. Stringent regulatory requirements and large capital expenditure need to effectively prohibit new entrants from entering this market, with CooperVisison having grabbed a quarter of this market.

This is complemented by CooperSurgical, a medical device and fertility business that focuses on women. It is this segment that the company has been trying to grow, in part through a $1.6 billion deal for Generate Life Science, and an $875 million deal for Cook Medical Reproductive health recently.

Following a rough patch during the pandemic, it was the post-pandemic recovery and dealmaking that meant that the company grew 2022 sales by 20% to $2.9 billion, with (adjusted) earnings seen over $13 per share.

Revenues recovered to $3.3 billion in 2022, came in around $3.6 billion in 2023, yet earnings were stuck below $13 per share. The company provided an initial 2024 guidance last year already, seeing sales up to $3.8 billion and change, with (adjusted) earnings seen close to $14 per share.

Trading at $335 in December of last year, the company still traded at a 24 times adjusted earnings multiple, while leverage was full around 3 times. Given all this, I was still cautious, although that the company has been growing into the valuation, mostly amidst a stagnant share price while operations grew at a modest pace.

Trading Range Bound

Since the start of the year, shares of Cooper Companies have traded in an $85-$100 range, which comes after the company announced a four-for-one stock split in February.

Later that month, the company announced a solid 9% increase in first-quarter sales to $932 million, with growth in the CooperSurgical business outpacing growth in the CooperVision segment. By now, the revenue composition is split just about two-thirds for CooperVision to a third for CooperSurgical, as most of the M&A efforts recently have focused on CooperSurgical.

Adjusted earnings rose by twelve cents to $0.85 per share, as the company hiked the full-year sales guidance to a midpoint of $3.87 billion, with earnings seen at $3.50-$3.58 per share. It is this lower end of the guidance that implies that earnings are seen at a minimum of $14 per share on a pre-split basis.

In May, Cooper Companies announced a 7% increase in second-quarter sales to nearly $943 million, with adjusted earnings up eight cents to $0.85 per share. The company hiked the full-year guidance modestly, now seeing earnings at a midpoint of $3.57 per share for the year.

A Small Deal

Following the resilient results for the first half of the year, the company announced a smaller deal early in August. Cooper Companies announced that its daughter company CooperSurgical acquired opb Surgical in a $100 million deal. obp provides single-use cordless surgical retractors with integrated multi-LED light sources.

With a $14.5 million revenue contribution, the deal comes at a 7 times sales multiple and is expected to be neutral to near-term earnings, although accretive beyond 2024. This is really just a bolt-on deal, with pro forma sales increasing by a mere 0.4% here.

This deal will increase pro forma net debt to $2.7 billion, and with just over 200 million shares trading at $95, the company commands a $19 billion equity valuation and near $22 billion enterprise valuation. At these levels, Cooper Companies is valued at nearly 6 times sales, and, of course, still nosebleed valuations at 27 times adjusted earnings.

In that respect, not much has changed as a $335 stock in December has risen to $84 per share based on the current share count, that is post the stock split. Trading at $95, valuation multiples have increased to the mid-twenties, or just over that at 27 times earnings. This is rather demanding as leverage remains full, moreover, these are quite adjusted earnings.

The Premium Persists

In light of the discussions above, it remains apparent that the premium valuation remains, and while this might be supported by solid high-single-digit growth (which is not all organic), the earnings multiples tell a different story. Valuations are full, considering the leverage employed and the fact that we are talking about adjusted earnings.

All this means that I am still not seeing a healthy future for The Cooper Companies, Inc., although shares have been trading at demanding valuations for a long period of time, even higher valuations in the past. This is of course a bad argument to be attracted to the shares, as the risk-reward does not seem favorably skewed at this time.