Gloom cant dim Coopers shine

7/7/2008


  Recent Price
$40
  Dividend
$0.92
  Yield
2.3%
  P/E Ratio
12
  Shares (millions)
179
  Long-Term Debt as % of Capital
31%
  52-Week Price Range
$59.05 - $35.37

Concerns about the housing-market downturn account for much of the 25% year-to-date decline in shares of Cooper Industries ($40; NYSE: CBE), a maker of electrical equipment and tools. But we see the stock’s tumble as an excellent buying opportunity for patient investors. Cooper is well-positioned to take advantage of global infrastructure spending and domestic energy-conservation efforts.

At just 11 times estimated year-ahead earnings, Cooper trades well below its five-year average forward valuation of 15 and the average of 13 for makers of electrical equipment. Through internal expansion and an aggressive acquisition strategy, the company seems capable of exceeding Wall Street expectations for 14% growth in per-share earnings this year. Cooper, yielding 2.3%, is a Long-Term Buy.

Healthy end markets
Electrical products are Cooper Industries’ main business, providing 87% of 2007 revenue. The company makes items ranging from energy-efficient lighting systems to fuses to fire-detection systems. A hardware unit (13% of 2007 revenue) sells an array of hand tools.

Utility, energy, and industrial markets account for 60% of sales, with just 18% from commercial construction and 10% from residential construction. Spending on new construction is likely to slow in coming months. But about half of the commercial business comes from upgrades, repairs, and renovation projects, which shouldn’t see such a slowdown.

About 70% of sales come from North America, with another 17% from Europe, the Middle East, and Africa. Cooper has a small presence in Latin America (7% of sales) and Asia (6%), but is working to expand in those emerging economies. Sales in developing markets jumped more than 30% last year, and the company hopes to eventually generate 50% of revenue from international markets.

Optimistic outlook
In the March quarter, despite a sharp decline in residential construction and slowing growth in commercial construction, Cooper received orders exceeding revenue in seven of eight divisions. Energy and utility end markets set the pace.

The company sees new opportunities as customers look to reduce energy consumption. Lighting accounts for roughly 30% of the energy use in a typical office building, and Cooper’s energy-efficient systems can significantly reduce costs. About 80% of U.S. buildings use lighting systems more than 20 years old, and Cooper expects strong demand for lighting upgrades. In 2007, the lighting division grew sales at twice the rate of the industry.

Per-share earnings rose 14% in the March quarter and have grown at an annualized rate of 20% over the last five years. Cooper has already managed to fatten profit margins this year despite rising commodity prices, and substantial additional cost cuts are planned.

While concerns about slower construction spending are legitimate, the stock’s sell-off seems overdone. With a strong track record and new growth opportunities, Cooper offers superior capital-gains potential over the next two to three years. An annual report for Cooper Industries Ltd. is available from 600 Travis, Suite 5600, Houston, Texas, 77002; 713-209-8400; www.cooperindustries.com.


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