Sufferers of chronic obstructive pulmonary disease, asthma, lung disease, or asthma typically receive oxygen therapy at home through stationary oxygen concentrators and metal oxygen tanks, explains Douglas Gerlach, growth stock expert and editor of SmallCap Informer.
Inogen, Inc. (INGN) markets portable oxygen concentrators (POCs) that can weigh less than six pounds, depending on batteries, and run for between five and 13 hours. Users can employ the device overnight as well.
The company’s three main devices sell for $2,300-$2,400. But the POC market is highly competitive, and Inogen has struggled over the past year, with its price dropping from a $283 a year ago to about $46.
Sales were significantly affected a year ago by a national provider reducing purchases of Inogen products from $9.3 million to $700,000. Inogen has some digging out to do before growth can continue, but in its latest conference call management believed underlying growth in the business is 19%.
The company expects the number of Americans aged 65 and above to grow 3% annually through 2025. This group is more susceptible to COPD diagnoses because its smoking rate is higher.
Inogen launched the Inogen One G5 in April, sold directly to consumers. Management described the G5 as the smallest, lightest, quietest portable oxygen concentrator on the market.
The company also acquired New Aera, which has the SideKick Tidal Assist Ventilator. TAV is a noninvasive product weighing 4 ounces that some patients with chronic lung diseases can employ. Management expects revenues associated from New Aera to begin in 2020.
Another issue is that traditional home medical equipment providers are decreasing demand for POC devices because reimbursement pressure from Medicare. Once patients enter the capped period, they have difficulty obtaining a POC. But Inogen sees great growth potential here, as the 2017 penetration rate was only about 11%.
For revenues, we assume that after a rough 2019, the company should be able to hit the low end of double digits at 10% growth. With new products and a more effective sales team, that rate should be achievable. The Street is projecting 3.8% revenue growth in 2019, followed by a 9.7% increase next year.
Inogen has seen its P/E collapse from nosebleed, three-digit heights to a more earthbound 25 as investor fervor turned to fear. We don’t expect Inogen’s valuation to return to the average five-year high of 107.9 or the average five-year low of 47.7.
Particularly for high-growth companies with expansive P/Es, there is always risk after a company has stumbled and the price has tumbled that the stock’s current price represents a value trap.
Yet we do expect the valuation to increase from the current P/E. An annual high P/E of 30 is reasonable given the expectations of lower growth and the company’s industry.
With EPS growth of 11% resulting in earnings of $3.13 in five years, the stock’s high price could reach $94 in the next five years. We’re assuming a low price of $37.20 over the next five years. This is the result of multiplying the expected low annual P/E of 20 by the most recent four quarters’ EPS of $1.86.
With these assumptions, the risk-reward ratio is 5.2 to 1, above our minimum of 3 to 1. The expected compound annual return is 15.2%, above our goal of 15%.
The portable oxygen concentrator market will grow for years to come as the population ages. In a competitive market with a lot of players that relies on Medicare payments, Inogen has challenges. But over the long term the market should reward solid growth, even if not as spectacularly as in the past.
