Inogen,
Inc. (INGN, $61.04): “While Inogen’s
latest earnings release was a home run; is the stock full of hot air?”
By:
John O’Connor, AIM
Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by myself,
and it expresses my own opinions. I am not receiving compensation for it and I
have no business relationship with any company whose stock is mentioned in this
article.
Summary
·
Inogen, Inc. (NSDQ: INGN) is a medical technology company and manufacturer of portable
oxygen concentrators (POCs). These concentrators provide long-term oxygen
therapy for patients suffering from chronic respiratory conditions.
- Inogen’s launch of their latest POC earlier this year has proven to be quite successful and much of the stock’s price appreciation can be attributed to this release.
- Strong emphasis is being placed on the sales channel as it grew 40.7% in the second quarter of 2016 from Q2 2015. The sales channel also represented 83.5% of total revenues. Overall revenues grew by 23.9% in the same period.
- Inogen continues to experience headwinds from its rental segment, with rentals experiencing a 22.8% decline in revenues in Q2.
- Average selling price has declined about 8% year over year, primarily due to an increase in business-to-business selling.
Key
Points: It is safe to say that Inogen has
experienced a great year as the stock has steadily climbed from ~$30 at the
start of the year to ~$60 today. As previously mentioned, the release of the
Inogen One G4 oxygen concentrator is chiefly responsible for rise in the stock
price. As of late, Inogen has been focusing more on their sales channels and
less on the rentals. To better position itself among consumers and increase
direct-to-consumer revenues, Inogen had to look no further than the G4
concentrator. Its ultra lightweight build and increased portability makes for a
great selling point to individual consumers looking for long term oxygen
therapy solutions.
To further reinforce Inogen’s shift
from rental to sales, the G4 is only available for purchase. The reason for
this desire to stray from rentals is because of a steep decline in Medicare
rental reimbursement rates, which have dampened revenues for this segment. To
make up for this decline in rentals, the salesforce has been ramped up. Sales
and marketing expenses were up to $9.6 million in 2Q16 versus $7.6 million in
2Q15. Not only is the salesforce headcount increasing, but marketing campaigns
have been rolled out as well in an effort to establish Inogen’s brand and draw
in new customers.
Also worth noting is the decline in
average selling price (ASP), which has declined about 8% year over year.
Management explained at the second quarter earnings call that this drop in ASP
was from a mix shift toward business-to-business compared to the direct-to-consumer
sales. Unfortunately, management has not provided detailed information
regarding how ASP will trend other than that they believe the downward pressure
on ASP will continue to persist into the foreseeable future.
What has the stock done lately?
Inogen has been able to keep the
ball rolling the past quarter as the stock price has grown ~17% since July of
this year. Two of the past three quarters have been a beat and raise; including
4Q15 actual EPS of $0.19 vs the consensus $0.07. Much of this success is due to
the new G4 POC, which still has significant runway left.
Past Year Performance:
The stock has performed
exceptionally well for investors this year; generating a whopping 56% return
YTD. Of course, the argument can be made that Inogen is overpriced, currently
trading at a P/E multiple of 89.76x. Compared to the industry average of 48.6x,
there is some concern that this stock may come back down to earth sometime
soon.
Source:
FactSet
My Takeaway
While it is evident that Inogen has
experienced tremendous growth due to an innovative product release and shift in
selling strategies, there remains concern that it will be difficult to maintain
this growth. Continued innovation and upgrades to the existing G4 product will
be needed for revenues to continue growing at such a rate. Furthermore, a P/E
multiple as high as Inogen’s suggests that investors should hold off on buying until
the price comes back down to around $50.
Source:
FactSet
