Cooper Companies at the Crossroads: Vision Clarity Meets Surgical Distraction (NASDAQ:COO) - COO Stock Research Report

## Executive Summary / Key Takeaways * A Conglomerate Discount in Plain Sight: The Cooper Companies' dual-segment structure has destroyed value over the past five years—revenue grew 47% from 2019-2024 while free cash flow collapsed from $421 million to $288 million, a direct result of pouring over $3 billion into the underperforming CooperSurgical segment while starving CooperVision of adequate capacity. * CooperVision's Inflection Point: Manufacturing constraints that limited MyDay production have finally been resolved, enabling a global rollout of fitting sets and trial lenses that grew over 300% year-over-year, positioning the segment to recapture market share and accelerate growth in fiscal 2026 through premium product launches like MiSight in Japan. * CooperSurgical's Value Trap: The surgical segment generated just $4.2 million in operating income on $342 million in Q3 2025 revenue—a 1.2% margin—while facing fertility market softness, PARAGARD volume declines, and a material weakness in IT controls that raises questions about operational discipline. * Activist Catalyst Accelerating: Jana Partners and Browning West have launched campaigns advocating for strategic separation, noting the stock trades at a decade-low 16x forward P/E versus a 23x historical average, creating a potential unlock event that management can no longer ignore. * The $2 Billion Free Cash Flow Promise: Management's pledge to generate approximately $2 billion in free cash flow over the next three fiscal years hinges entirely on completing CooperVision's CapEx cycle and improving working capital conversion, but capital allocation discipline remains unproven given the surgical segment's track record. ## Setting the Scene: When Vision Meets Indigestion The Cooper Companies, founded in 1958 as a pure-play vision business, transformed itself in the 1990s by adding CooperSurgical, initially a small tax-motivated addition that has since consumed over $3 billion in capital. Today, the company operates two fundamentally different businesses: CooperVision, the world's second-largest contact lens manufacturer with 26% global market share, and CooperSurgical, a collection of fertility and women's health assets that has become a capital sinkhole. This dual-segment structure, once justified as diversification, now represents the central tension in the investment thesis. The strategic shift that began around 2017—aggressively investing in CooperSurgical through acquisitions like Cook Medical ($300 million), obp Surgical ($100 million), and a fertility device company ($33.5 million)—coincided with deteriorating capital efficiency. While total revenue increased 47% from 2019 to 2024, non-GAAP EPS grew only 20% and free cash flow declined 32%. This divergence reveals the core problem: management allocated capital to a segment with inferior returns while underinvesting in CooperVision's manufacturing capacity, creating a value-destroying conglomerate discount that activist investors are now targeting. CooperVision generates approximately 68% of revenue but carries the entire company's profit burden, delivering operating margins in the high twenties while CooperSurgical struggles to break even. The contact lens market itself remains healthy, growing at mid-single digits with a steady shift toward premium silicone hydrogel lenses and toric/multifocal products. CooperVision's technological leadership in these high-value categories should command a premium valuation, yet the stock trades at just 16x forward earnings—below medtech peers and far below its historical average—because investors correctly perceive that surgical segment drag offsets vision segment strength. ## Technology, Products, and Strategic Differentiation CooperVision's competitive moat rests on two pillars: specialty lens leadership and manufacturing scale. The MyDay daily silicone hydrogel family represents the company's primary growth engine, having grown double digits in Q3 2025 despite overall segment softness. For years, manufacturing constraints limited MyDay's ability to compete, forcing sales teams to push the older Clarity product in markets like Asia Pacific where the two lenses were viewed as similar. This strategic error—born of capacity limitations rather than market choice—created a self-inflicted wound as customers delayed Clarity reorders to trial MyDay, depressing near-term sales. The resolution of these constraints changes everything. With full sales execution capabilities now in place, CooperVision accelerated the global rollout of fitting sets and trial lenses, achieving over 300% growth in trial sets year-over-year. This matters because contact lens adoption follows a predictable pattern: fitting sets lead to trials, trials lead to prescriptions, and prescriptions generate recurring revenue for years. The 30 new private label contracts underway, combined with MyDay Energys launching in Europe in early fiscal 2026 and MyDay Multifocal expanding in Asia Pacific, create a visible path to market share gains. MiSight, the company's myopia management lens, grew 23% organically in Q3 2025 and is on track for $100 million in fiscal 2025 sales. Final regulatory approval for Japan—where myopia rates are among the world's highest—positions MiSight for commercialization in early 2026. More importantly, management's new promotional strategy offering one to three months free addresses the real barrier to adoption: parental hesitation about upfront costs and child comfort. With 90% retention rates once children adapt, this trial-based model converts hesitant parents into long-term customers, expanding the addressable market beyond the initial niche. CooperSurgical's technology portfolio tells a different story. The fertility business faces market softness as Asia Pacific clinics delay capital purchases and manage cash conservatively, while the office and surgical segment relies on acquisitions for growth. PARAGARD, the only non-hormonal IUD in the U.S. market, declined 10% in Q3 as volumes decrease and alternative birth control options pressure the entire IUD category. The recent acquisition of obp Surgical grew 23% in Q3, but this highlights a deeper problem: organic growth is anemic, requiring continuous deal activity to mask underlying weakness. ## Financial Performance & Segment Dynamics Q3 2025 results expose the segment divergence in stark terms. Consolidated revenue of $1.06 billion grew 5.7% reported and 2% organically, below expectations due to a global decline in Clarity lenses and greater-than-expected weakness in Asia Pacific e-commerce. CooperVision's $718 million in revenue grew 6.3% reported but only 2.4% organically, with Asia Pacific declining 5% organically as Clarity fell double digits in Japan and China. The Americas grew just 2% (3% organically) as distributor inventory tightening and Clarity softness offset MyDay gains.

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What matters is the profitability impact. Despite top-line pressure, CooperVision's operating income reached $202.6 million—a 28.2% margin that funds the entire enterprise. The e-commerce weakness in Asia Pacific, while concerning for growth, had minimal margin impact because those channels carry very low margins. This reveals a strategic choice: CooperVision is sacrificing low-margin volume to protect profitability, a disciplined response that preserves capital for premium product expansion. CooperSurgical's $342 million in revenue grew 4.5% reported and 2% organically, but operating income collapsed to $4.2 million—a 1.2% margin. This deterioration stems from inventory and long-lived asset write-offs related to a product line exit, but the underlying trend is equally troubling. Fertility revenue grew just 3% organically as clinics delay capital purchases, while PARAGARD's 10% decline reflects structural headwinds rather than cyclical softness. The segment's $4.671 billion in identifiable assets—38% of the total—generate negligible returns, representing a massive capital misallocation. Consolidated gross margin improved 70 basis points to 67.3%, driven by efficiency gains, favorable mix, and foreign exchange. This strength is entirely attributable to CooperVision's manufacturing leverage and premium product mix. Operating expenses grew in line with sales, but the corporate segment's $22.7 million loss increased due to higher salaries and benefits, partially offset by lower professional fees. Management is executing productivity initiatives and reviewing organizational infrastructure, but these efforts are too recent to quantify.

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Free cash flow of $165 million in Q3 was strong, bringing the nine-month total to $385 million and already meeting the full-year guidance of roughly $385 million. However, this remains well below the $421 million generated in 2019, despite revenue being 47% higher. Net debt declined to $2.35 billion with a leverage ratio of 1.77x, providing adequate liquidity but limiting acquisition flexibility. The company repurchased 724,000 shares for $52.1 million in Q3, leaving $164 million available under its $1 billion authorization—modest capital return relative to the promised $2 billion in three-year FCF generation.

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## Outlook, Guidance, and Execution Risk Management's Q4 2025 guidance reflects conservatism born of recent disappointments. Consolidated revenue guidance of $1.049 to $1.069 billion implies 2% to 4% organic growth, with CooperVision at $700 to $713 million (2% to 4% organic) and CooperSurgical at $350 to $356 million (2% to 4% organic). Non-GAAP EPS guidance of $1.10 to $1.14 suggests modest year-over-year improvement, while gross margins are expected to be slightly lower due to tariffs, offset by better operating margins from restructuring. The fiscal 2026 outlook hinges on three assumptions: CooperVision outpaces the contact lens market through MyDay momentum and MiSight launches, CooperSurgical rebounds as Asia Pacific fertility cycles recover, and the company generates approximately $2 billion in free cash flow over three years. The first assumption is credible—MyDay's 300% increase in trial sets and 50% increase in fitting sets create a visible pipeline, while MiSight's Japan launch opens a massive market. The second assumption is questionable, as fertility market softness is expected to persist through Q4 2025 with no clear catalyst for recovery. The third assumption depends entirely on completing CooperVision's CapEx cycle and improving working capital conversion, which management has not historically prioritized. Management acknowledges they "got in ahead of ourselves a little bit" in previous quarters, explaining the more conservative Q4 guidance. This candor is welcome but raises execution risk questions. The restructuring plan, while described as "meaningful," lacks quantified benefits, and the material weakness in IT general controls at CooperSurgical—related to ERP system implementation—remains unresolved despite remediation efforts. These operational gaps suggest management's focus has been divided between fixing surgical segment problems and accelerating vision segment growth. Tariffs present a $4 million headwind in fiscal 2025 and a potential 3% earnings impact in fiscal 2026 if mitigation actions fail. Management plans to offset this through price increases, supply chain adjustments, and manufacturing changes, but these responses are standard and may not fully protect margins in a competitive pricing environment. ## Risks and Asymmetries The activist campaign represents both the largest risk and the most significant potential catalyst. Jana Partners and Browning West are pushing for strategic alternatives, including a potential separation of CooperVision and CooperSurgical. If successful, this could unlock substantial value by eliminating the conglomerate discount and allowing each business to pursue focused strategies. However, breakups are complex and costly, and management may resist, creating a protracted proxy battle that distracts from operations. The risk is that activists win board seats but fail to drive a separation, leaving the structural problems intact. CooperSurgical's operational challenges extend beyond market softness. The material weakness in IT general controls, identified in fiscal 2024 and still being remediated, suggests inadequate personnel, training, and risk assessment processes. This matters because it raises questions about the quality of financial reporting and the segment's ability to integrate acquisitions effectively. The Q3 inventory and asset write-offs related to a product line exit may be one-time, but they reflect poor capital allocation decisions that destroyed shareholder value. CooperVision faces competitive pressure in Asia Pacific, where pure-play e-commerce weakness reflects aggressive pricing from larger competitors. While management correctly notes this low-margin business has minimal profit impact, continued share loss in the fastest-growing region could signal broader competitive vulnerability. The Clarity decline, driven by customers shifting to MyDay, is ultimately positive for mix and margins but creates near-term revenue headwinds that may persist until MyDay fully scales. The fertility market's underlying fundamentals remain strong—one in six people globally experience infertility, and delayed childbirth trends support long-term demand. However, near-term cyclical pressures from Asia Pacific cycle declines and clinic cash management could extend longer than management expects. If fertility softness persists into fiscal 2026, CooperSurgical's already minimal profitability could turn negative, forcing a strategic writedown. ## Competitive Context and Positioning CooperVision holds the number two global position with 26% market share, trailing Johnson & Johnson's (TICKER:JNJ) 37% and tied with Alcon's (TICKER:ALC) 26% while leading Bausch + Lomb's (TICKER:BLCO) 10%. The company's differentiation lies in specialty lenses—toric and multifocal products grew 10% in Q3, while MiSight myopia management grew 23%. This focus on high-value categories supports gross margins of 67%, well above Alcon's (TICKER:ALC) 56% and Bausch + Lomb's (TICKER:BLCO) 59%, demonstrating pricing power in segments where technical performance matters more than brand. The competitive dynamic in Asia Pacific reveals CooperVision's vulnerability. Pure-play e-commerce channels declined sharply as competitors became more aggressive, particularly in China where business fell 25% in Q1 and remained weak in Q3. Management's response—de-emphasizing low-margin volume—protects near-term profitability but risks ceding market share that becomes harder to recapture later. The MyDay versus Clarity cannibalization, while strategically sound, created a self-inflicted wound that competitors exploited. CooperSurgical competes in fragmented fertility and women's health markets where scale advantages are limited. PARAGARD's 10% decline reflects not just competitive pressure but structural shifts toward hormonal IUDs and alternative contraception. The segment's 1.2% operating margin compares unfavorably to Hologic's (TICKER:HOLX) 32.7% operating margin in women's health diagnostics, highlighting CooperSurgical's lack of competitive moats and operational efficiency. ## Valuation Context At $77.93 per share, Cooper Companies trades at 38.2x trailing earnings and 19.1x forward earnings, with an EV/EBITDA multiple of 16.08x. The forward P/E of 19.1x sits near a decade low compared to the company's historical average of 23x, reflecting market skepticism about the dual-segment strategy and surgical segment performance. This discount exists despite CooperVision's 67% gross margins and strong market position, suggesting the market values the company as a struggling conglomerate rather than a high-quality vision business burdened by a surgical anchor. Free cash flow generation remains depressed at $288 million TTM, yielding just 1.9% based on enterprise value, but management's $2 billion three-year FCF target implies a dramatic inflection to approximately $667 million annually. If achieved, this would represent a 4.3% FCF yield on current enterprise value, far more attractive than today's valuation suggests. The key question is whether management will deploy this capital wisely—reducing debt, repurchasing shares at these discounted levels—or squander it on additional surgical acquisitions. Peer comparisons highlight the valuation gap. Alcon (TICKER:ALC) trades at 22.5x forward earnings with lower gross margins and slower growth, while Bausch + Lomb (TICKER:BLCO) trades at 13.6x forward earnings but operates at a loss. CooperVision's profitability and growth profile more closely resembles Alcon's (TICKER:ALC), yet the conglomerate structure applies a discount typically reserved for turnaround situations. A separation would likely value CooperVision at a premium multiple while exposing CooperSurgical as a low-margin business requiring substantial restructuring. ## Conclusion The Cooper Companies sits at an inflection point where strategic clarity will determine whether the stock is a value trap or a value unlock. CooperVision has resolved its manufacturing constraints, built momentum in premium MyDay products, and secured regulatory approval for MiSight's Japan launch—setting the stage for accelerated growth and market share gains. However, this strong foundation is undermined by CooperSurgical's operational struggles, minimal profitability, and the capital allocation mistakes that destroyed free cash flow over the past five years. The activist pressure from Jana Partners and Browning West creates a catalyst that management can no longer ignore. A separation of the vision and surgical businesses would eliminate the conglomerate discount, allow each segment to pursue focused strategies, and likely unlock substantial shareholder value. The promised $2 billion in free cash flow over three years provides the financial firepower for either debt reduction, aggressive share repurchases at current depressed valuations, or funding a breakup. The investment thesis hinges on two variables: whether management embraces strategic alternatives rather than defending a failed conglomerate strategy, and whether CooperVision's MyDay and MiSight momentum can sustain high-single-digit organic growth while expanding margins. If both conditions materialize, the stock's decade-low valuation offers meaningful upside. If management continues pouring capital into surgical acquisitions while the vision segment faces competitive pressure, the activist campaign may be the only force preventing further value destruction.