If you want to see for yourself how tough the market can be, look no further than the price action of Inogen, Inc. common stock (NASDAQ:NASDAQ:INGN).
Shares of this healthcare company came down like a New Year’s rocket after last year’s detonation (down about 70%):
With prices moving like this, even the most optimistic analysts tend to get scared. Indeed, the most recent coverage on Seeking Alpha was a deterioration of the rating.
But again, these are the kinds of circumstances that create buying opportunities that I like: a struggling stock that the market has left behind.
However, distressed stocks cannot be bought blindly. It’s not like buying an average high-yielding blue-chip stock that will likely perform at least fairly well for the foreseeable future.
With titles in difficulty, understanding The issue at hand and consideration of quantitative factors are essential to good stock selection.
In this analysis, I examine why Inogen shares have fallen so much. Since my approach to equity research is based on selecting quantitative factors that predict future outperformance, I share some key indicators that help achieve this goal.
I also evaluate the actions taken by management to resolve the problems clearly present at Inogen.
Based on my findings, I am issuing a Buy rating for Inogen. I suggest keeping it in a portfolio of similar issues for risk diversification.
Why Inogen performed poorly
As is so often the case with stocks that have performed poorly, the first “flash decline” came after earnings were announced that missed consensus estimates.
The stock fell from around $23 to around $16 in late February following a disappointing results announcement. Inogen actually beat EPS but missed on revenue.
During the year, the results continued to vary and were often out of step with the consensus: in May, Missed inogen EPS and revenue targets. In August, EPS exceeds estimates while income was lacking. In November, Missed SPE but revenues have beaten.
Following mixed results, Inogen was virtually unable to turn around throughout the year – and much of the poor performance appears to be attributable to this mismatch between expectations and performance rather than more fundamental adversities.
A look at the numbers suggests Mr. Market is too negative
Statistically, Inogen is oddly cheap: it trades at an EV/R ratio of just 0.06. The EV/R ratio (enterprise value to income) measures how much a buyer for control would have to pay to buy all the stocks and bonds in the market.
In other words, it is what a buyer would have to pay to own the company’s assets stripped of all stock and bond claims relative to what those assets generate.
I use the EV/R ratio on distressed stocks because I find it more appropriate than conventional measures such as P/E and PFCF (price to free cash flow), because distressed companies often do not produce no profits or free cash flow while they are sailing. regardless of the adversity they face. Therefore, you need another metric that measures the “price” the market places on what the company produces.
Inogen trades at a market cap of around $130 million. This makes it a small-cap company. I think small caps are more likely to trade below their intrinsic value for longer than other stocks – and I think the market is more likely to overreact to temporary adversities. So, the simple fact that Inogen is a small cap – combined with the low EV/R ratio – are indicators to me that the stock is undervalued.
Although the mixed reports from 2023 might make you think that Inogenous is nowhere on a sliding trajectory, it has actually managed to grow respectably over the years. Here is a graph of his income over 5 years:
As I will explain below, Inogen appears committed to continuing to grow its business.
Management takes action
So far, these are just numbers. While you can buy numbers based on statistics without knowing what the company actually does, it’s good to know what you’re getting into.
Inogen’s mission is to manufacture portable oxygen concentrators. This is a medical device designed to provide oxygen therapy to people who require oxygen concentrations higher than those in ambient air.
It’s good for customers. So what about shareholders?
One of Inogen’s key actions to drive shareholder value and stabilize mixed performance is to attempt to increase margins. In doing so, management highlighted three short-term actions:
As we have seen, short-term actions primarily relate to cost reduction (“Executing Selective Reductions (Sales, General and Administration)” and “Reducing Facilities Footprint”).
The company also highlighted the following mid-term actions focused on revenue growth:
Inogen has and will launch a variety of products in 2023/2024 to help drive this revenue growth:
In addition to the near-term pipeline, Inogen maintains a pipeline that extends well into a decade. Between 2024 and 2026, Inogen seems to be focusing in particular on improving the capabilities of its products:
In summary, Inogen is focused on improving margins, revenue growth and innovation to remain competitive and reward shareholders.
To conclude, I would like to highlight Inogen’s financial situation: Inogen has approximately $225 million in current assets. This includes $138 million in cash and equivalents. That compares to only about $113 million in total liabilities. None of the liabilities are long-term interest-bearing debt, so all will be accounts payable, leases, taxes, etc. In other words, Inogen would hold approximately $112 million in cash if all liabilities were paid and all accounts receivable. restored. Compare that to Inogen’s market cap of around $130 million. You pay almost nothing for the business itself.
I’ve covered several stocks that are technically or fundamentally in trouble. I find opportunities in this area intriguing because they often have substantial benefits that others will happily leave behind to do something “safer.” Investing in this area, however, comes with obstacles: any difficult problem may not work. Distressed securities often end in bankruptcy, sometimes resulting in a 100% loss. But a stock can’t go any lower than that – even though it can potentially go up several hundred percent. This is the statistical advantage of buying stocks with substantial upside potential. In order to obtain a range of results representing an average of this upside potential, I suggest using a fairly broad diversification. It’s about managing risk while maintaining upside potential on average. I believe adhering to this is the most relevant risk management strategy when it comes to investing in a show like Inogen.
Inogen is a healthcare company that manufactures portable oxygen concentrators. Its stock has traded significantly in 2023 and is down about 70%.
This represents a buying opportunity since the market, in its fear, seems to overlook the fact that Inogen is now very cheap: it trades at an EV/R ratio of just 0.1.
Inogen’s management appears to understand the need to continue to innovate and reward shareholders: the company has a strong product portfolio and hopes to increase its margins. Its strong financial situation should support this.
I suggest holding Inogen in a portfolio of other distressed stocks that exhibit similar quantitative properties. I’m issuing a Buy rating with this caveat in mind.