After A 40% Rally Can Cooper Stock See Further Gains?

After a 43% rise since the March 23 lows of this year, at the current price of around $348 per share we believe Cooper stock (NYSE: COO), best known for its Cooper Vision lenses, has reached its near-term potential. Cooper’s stock has rallied from $243 to $348 off the recent bottom compared to the S&P which moved 54%, with the resumption of economic activities as lockdowns are gradually lifted. COO stock is also up 59% from levels seen in early 2018, two years ago.

COO stock has fully recovered to levels of over $350 seen before the drop in February due to the coronavirus outbreak becoming a pandemic. This seems to make it fully valued as, in reality, demand and revenues will likely be lower this year than last year.

Some of the 59% rise of the last 2 years is justified by the roughly 24% growth seen in Cooper’s revenues from 2017 to 2019. Also, the company managed to expand its Net Margins slightly by 1% to 17.6%, which translated into a 24% growth in earnings. Given the growth in revenues and margins, the company’s P/E Multiple has also expanded. We believe the stock is likely to see downside despite the recent uptick and the potential weakness from a recession-driven by the Covid outbreak. Our dashboard, ‘What Factors Drove 59% Change in Cooper Stock between 2017 and now?‘, has the underlying numbers.

Cooper Stock’s P/E multiple changed from 22x in 2017 to 17x in 2019. While the company’s P/E is 23x now, there is a potential downside risk when the current P/E is compared to levels seen in the past years, P/E of 20x at the end of 2018, and P/E of 17x as recently as late 2019.

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So what’s the likely trigger and timing for downside?

The global spread of Coronavirus has meant a decline in hospital visits and economic growth. For Cooper, the sales declined 10.8% to $1.7 billion for the nine months period ending July in fiscal 2020 (fiscal ends in October). However, the company in its recent quarterly earnings conference call stated that sales in all geographies improved during the quarter gone by. The company is a leader in the markets of specialty lenses, offered under Biofinity and Clariti brands. Furthermore, the company’s new product, MiSight, a single day wear contact lens, has been approved by the U.S. FDA to slow the progression of myopia when initially prescribed for children 8-12 years old. MiSight garnered $1.6 million in sales in Q3 fiscal 2020, but the sales will likely grow exponentially over the coming years. That said, much of these factors appears to be priced in the current stock value of $348, despite the expected recovery in demand post Covid.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. Following the Fed stimulus — which set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view. With investors focusing their attention on 2021 results, the valuations become important in finding value. Though market sentiment can be fickle, and evidence of an uptick in new cases could spook investors once again. COO stock at $348 is trading at 36x its expected fiscal 2020 earnings, which is higher than levels of under 29x in 2017 and 34x seen in as recently as late 2019.

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