Tuesday, October 4, 2016

A current AIM holding in the small cap equity fund: Inogen, Inc. (INGN) by John O'Connor. "High P/E ratio needs watching for this med tech firm"

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

Image result for Inogen logo
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.


·         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