We came across a bullish thesis on The Cooper Companies, Inc. (NASDAQ:COO) on ValueInvestorsClub by dsteiner84. In this article, we will summarize the bulls’ thesis on COO. The company’s shares were trading at $98.10 when this thesis was published, vs. the closing price of $81.22 on Mar 14.
A doctor wearing gloves and a mask holding a pair of contact lenses in their hand.
COO develops, manufactures, and markets contact lens wearers. It operates through two segments: CooperVison and CooperSurgical. CooperVison toric focuses on spherical, toric and multifocal lenses for correcting vision challenges. CooperSurgical offers women’s health products. CooperVison accounts for 67% of the revenue with the remaining 1/3rd coming from CooperSurgical.
The lens industry operates as an oligopoly with players like J&J (37% share), COO (26%) and Alcon (25%) capturing most of the market share. COO has been able to increase its market share from 19% in 2013 to 26% in 2023 at the expense of J&J. This is primarily due to better innovation, favorable pricing and the ability to tap the private label space offered by retailers like Costco. The threat of new entrants seems low due to stringent FDA regulation, high CAPEX requiring technical know-how and customer loyalty. The market structure along with COO’s unique capabilities allow the company to grow at a rate that is 100-200 basis points higher than the industry.
COO is also a leader in the fertility segment with 25% of the market share (excluding China). The industry is expected to grow 5-10% as access to fertility clinics increases and the average maternal age rises. COO has achieved a double-digit organic rate and this should be sustainable with advancements in technology and higher disposable income.
FCF conversion has been low at 35-40% on account of weaker margins, inefficient production and dilutive acquisitions. A higher CAPEX rate (10% of sales) should stabilize to a normal level of 8% and this would translate into an FCF conversion rate of ~80%. The capacity expansion should also improve margins, with EPS growing low to mid-teens.
The share is trading close to 20x its 2025 EPS, which is much lower than the trailing 12-month EPS multiple of Alcon which is above 40x. The pricing appears reasonable as the management expects 6-8% revenue growth and 10-13% constant currency EPS growth driven by expanding margins.
While we acknowledge the potential of COO as an investment, our conviction lies in the belief that some AI stocks hold greater promise for delivering higher returns, and doing so within a shorter time frame. If you are looking for an AI stock that is more promising than COO but that trades at less than 5 times its earnings, check out our report about the cheapest AI stock.
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