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Not Seeing Value at Cooper

The contact lens maker has been slammed, and more weakness could be coming.

Is there currently a more hated stock in this market than Cooper Companies (COO) ? The maker of contact lenses and gynecology equipment was downgraded Monday by Prudential to underweight from neutral. This was the sixth rating cut since Dec. 12, when the company posted disappointing results for its fiscal fourth quarter (ended Oct. 31).

Cooper earned 61 cents a share in the quarter, falling well short of analysts' 79-cent consensus estimate. Revenue fell 2% to $216 million, as the company warned of lower contact lens demand and a shipping delay as management consolidated its distribution network. Fiscal 2007 earnings guidance was also cut to between $2.90 and $3.05 a share, from the previous $3.35 to $4.

The stock has lost 14.5% since the earnings report, closing Tuesday at $45.02, and Cooper now trades at a 14% discount to its average historical valuation.

I'm here to answer readers' questions: Should I do it? Is Cooper worth bottom-fishing for at current levels, now that half of the 12 analysts on the stock have downgraded it?

It's worth noting that analysts' consensus earnings estimate for fiscal 2007 is $2.60 a share, about 13% below the midrange of management's new guidance. The company is currently the only major lens manufacturer not to have a silicon hydrogel (SiH) product on the market. These products have captured 41% of the U.S. market and allow more oxygen to the cornea, making it possible to continuously wear lenses for up to 30 days.

Cooper's entrance to the SiH market has been further delayed by manufacturing inconsistencies. While some of its Biofinity lenses hit the market in 2006, a full SiH launch will likely be pushed out to the second half of 2007, from a previous target of December 2006.

Management has also yet to show its own support for Cooper, by pledging to buy back any shares. The company does offer a semiannual dividend of three cents a share, but the 0.1% yield is not very enticing when the average

S&P 500

stock pays 1.75%.

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With that in mind, I believe that readers should avoid Cooper at current levels. The SiH lens-manufacturing issues should hang over the stock for the next couple of quarters, and management has not shown any signs that it is confident in a near-term recovery.

Even though the company has already weathered several downgrades in the past week, I believe the shares could fall below $40 in the first half of 2007.

David Peltier is a research associate at In keeping with TSC's editorial policy, he doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Peltier appreciates your feedback;

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