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Bull of the Day: Inogen (INGN)

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Inogen (INGN - Free Report) is a $1.75 billion maker of portable oxygen concentrators, or POCs, that primarily serve patients with obstructive pulmonary disease.

The company's compact, lightweight and travel-approved portable oxygen concentrators are designed to free patients from heavy tanks, managing tank refills or being tethered to stationary systems.

Inogen offers its oxygen concentrator, cart, carry bags, backpacks, external battery chargers and universal power supply to US and increasingly global markets.

We last covered Inogen as the Bull of the Day in April when my colleague Dave Bartosiak talked about the fundamentals and the chart. Here's what he had to say on April 19...

It should come as no surprise that INGN has been rallying for quite some time, in line with the increased EPS estimates coming from analysts. This is a stock that was trading below $45 in June of last year which has rallied all the way to $75. There’s been a bit of a consolidation recently with shares bouncing between $74 and resistance just under the 52-week high near $80. With the 50-day moving average providing support down at $72.66 I think there is a nice risk/reward scenario being carved out here.

Dave was a buyer of Inogen shares on the strong earnings momentum and the technical breakout above $76 in March for his Momentum Trader service.

And I am revisiting Inogen for two reasons. First, I bought INGN shares on May 3 for my new Healthcare Innovators portfolio because I really liked the company's niche in POCs.

Second, the company reported earnings on May 9 and delivered a big 125% EPS beat and solid revenue growth that inspired healthcare-focused research house Leerink Swann to raise their price target from $90 to $100.

Here's what I told my subscribers the first week of May when we entered Inogen...

The stock is richly valued, but with projected 17% sales growth this year and next, EPS growth is expected to hit 20% next year. Analysts at William Blair believe that Inogen is exhibiting strength in all three of its core revenue drivers as the company's thesis that POCs will become a large piece of the market is clearly playing out.

"We believe Inogen is the best positioned — both technologically and strategically — to benefit from this trend. Despite the strong stock performance, with penetration still low we believe Inogen is just in the early stages of growth and has years of strong performance still in front of it."

May 9 will be an important report for the company as the stock has run hard and lots of great expectations are priced-in at 81X this year's EPS of $1.03 and 71X next year's $1.18. As I indicated in our buy alert on May 3, Inogen is growing steady double-digit organic revenues in an under-penetrated market where it offers a superior product solution that benefits from modest Medicare and Medicaid reimbursement initiatives. Here's that sales growth (A=Actual, E=Estimate) on a 45-degree angle trajectory...

2015A $159 million
2016A $203 million = 28% growth
2017E $237 million = 17% growth
2018E $277 million = 17% growth

(end of May 3-5 commentary to subscribers)

Inogen estimates that the total addressable market (TAM) for POCs is near $4 billion. With over 3 million US patients currently in need of some type of POC, the company estimates the number of patients will grow 7-10% over the next 5 years.

They also noted in a recent investor presentation that potentially 50% of COPD (chronic obstructive pulmonary disease) patients are currently undiagnosed and that POCs have penetrated only 8% of the Medicare market, versus stationary and ambulatory solutions comprising the other 92%.

Analysts Raise EPS Estimates

Inogen's big earnings beat on May 9 was driven by roughly 22.1% growth in revenues, which totaled $52.5 million, beating the Zacks Consensus Estimate of almost $49.6 million.

Sales revenues surged 40.1% to $46 million, while rental revenues plunged 35.8% to $6.5 million, as the company shifts strategy.

Business-to-business domestic sales were up 84.2% on a year-over-year basis to almost $17.4 million, primarily driven by traditional home medical equipment provider purchases and the consistent strength of the private label partner.

Meanwhile, business-to-business International sales rose around 14.6% to almost $11.4 million on the back of solid demand and direct-to-consumer domestic sales advanced 27.8% to almost $17 million.

And given the company's forward guidance for sales (see below), Wall Street analysts responded with a 6.8% bump to this year's EPS projection, moving the consensus from $1.03 to $1.10. Next year's profit outlook received a similar boost, raising the Zacks consensus from $1.18 to $1.26.

Solid, Conservative Guidance

Inogen reiterated its 2017 revenue and adjusted EBITDA guidance. However, the company raised its full-year adjusted net income guidance.

Inogen projects revenues in the range of $233–$239 million, higher than the previous range of $230–$236 million. This represents year-over-year growth of 14.9%–17.8%. The company expects rental revenue to decline in 2017, courtesy of lower average rental revenue per patient.

Adjusted EBITDA is projected in the band of $46–$50 million, representing an increase of 6%–15.2% year over year.

Inogen expects adjusted net income in the range of $22 million to $24 million, up from the previously provided range of $21–$23 million. This represents 17% year-over-year growth at the midpoint.

The Growth of POC Demand

Inogen manufactures and markets a portable oxygen concentrator (POC) that’s generally viewed as best-in-class based on efficacy and size, allowing for superior portability and patient mobility. The company also implements a unique direct-to-consumer (DTC) sales strategy that -- despite well-known reimbursement headwinds -- protects profitability and margins while still allowing for higher R&D investment versus competitors.

Over the 2016-2021 timeframe, analysts have projected that Inogen can deliver a sales CAGR (compound annual growth rate) of nearly 15% -- even while absorbing incremental reimbursement cuts.

While my #1 healthcare megatrend, which I call Boomer Power, will drive more adoption of long-term oxygen technology and Inogen's POC solutions are gaining popularity with physicians and patients, there are some barriers the company will face in maintaining that double-digit CAGR.

These include a potential higher upfront cost to the patient versus traditional oxygen therapy, with the average selling price of most Inogen POC products at $2,495.

But awareness of Inogen's superior POC solutions will continue to grow as the company invests in building out its sales force and DTC marketing efforts and word of mouth take hold. And while cost has been frequently cited as an issue by physicians surveyed, continued technology improvements and higher patient investment in therapy decisions could help mitigate this barrier.

Disclosure: I own INGN shares for the Zacks Healthcare Innovators portfolio.

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