A Medical-Device Maker That Rules Its Niche

by Lawrence Meyers | June 14, 2012 10:05 am

If eyes are the windows of the soul, then any company involved with eyes should be able to see their way to profits — the soul of any stock. If a company can make a niche for itself within a given sector, such as the human eye, then all the better. Here’s a company that has done just that.

Cooper Companies (NYSE:COO[1]) provides lenses that correct near- and farsightedness, as well as various complex visual defects, such as astigmatism and presbyopia.

Cooper also develops, manufactures and markets medical devices, diagnostic products and surgical instruments and accessories that improve health-care delivery in various clinical settings. It markets its products through sales representatives, independent agents, and distributors. It overlaps here and there with some Johnson & Johnson (NYSE:JNJ[2]) products, but not so much as to be overwhelmed by the giant.

A company that specializes in a niche can often become the dominant branded player in that niche, which leads to a lot of pricing power and, consequently, strong financials and cash flow. Cooper is a perfect example of this. In its just-released earnings report, net income rose to $54.9 million, versus $35.4 million in the same quarter a year earlier, a 55.3% increase, on revenue increase of 5.9%.

Net income has risen three quarters in a row, and this quarter’s jump comes on top of a 17.5% rise in the fourth quarter of the last fiscal year. Meanwhile, revenue has increased for four consecutive quarters, with a jump of 11.2%, to $326.1 million, in the first quarter.

This comes after a 15.2% rise in the fourth quarter and an 18.9% in the third quarter (all YOY). These solid numbers are expected to flag a bit, however, as the company reduced net earnings estimates by two cents, to a range of $4.88 to $5.13.

The company is well-positioned financially, thanks to strong cash flow. FY2009 free cash flow was $130 million, which grew to $196 million in FY10 and $233 million in FY11. So far this year, the company has $80 million in FCF. Management has been using that cash to pay down debt, which is now down to $319 million, from $771 million in FY09. So that cash flow is being put to good use by paying down debt, making small acquisitions here and there, and expansion.

The company pays a teeny 0.1% dividend, but as time goes on, I expect the FCF to provide an opportunity to significantly boost that yield.

Cooper presently trades at 15x this year’s estimates, with long-term annualized growth pegged at 17%. That suggests the company is slightly undervalued at present. With its great cash flow, that pushes Cooper into the value category for me. It might deserve a spot in your value portfolio — or even your growth portfolio.

Lawrence Meyers does not own shares of any company mentioned.

Endnotes:
  1. COO: http://studio-5.financialcontent.com/investplace/quote?Symbol=COO
  2. JNJ: http://studio-5.financialcontent.com/investplace/quote?Symbol=JNJ

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