In the fall of 2022, I believed that there was little breathing room for investors in Inogen (NASDAQ:INGN). I considered shares to be a long-term growth story, facing real execution issues, leaving few green shoots to ignite optimism.
After a few years of stagnating sales and big losses, operating momentum is improving in recent times, driven by the exit of competitor Philips in these markets and a new management team making some right moves.
All this makes me upbeat, although any position here would still be highly speculative, with much more work to be done.
COPD Play
Inogen aims to help tens of millions of Americans as well as overseas patients which suffer from COPD. In fact, across the globe some 300 million people suffer from Chronic Obstructive Pulmonary Disease, caused by smoking, indirect smoking, pollution, among others.
The idea is that the company provides better quality of care to these patients through portable and stationary oxygen delivery machines. This can prevent many and expensive hospitalizations. While there are other portable oxygen cylinders on the market, the solutions offered by Inogen have less weight and have ease of transport.
In the decade leading up to 2022, the company has grown sales from about $10 million to over $300 million, as this growth sparked imagination among investors as well. A $15 stock in 2014 peaked at $300 in 2018, with the business commanding a >$6 billion valuation at the time. At the peak, the company generated over $360 million in sales, but operating profits were stuck in the mid-single digits.
Shares were down below the $100 mark pre-pandemic and recovered a bit during 2020 as there were hopes that Inogen could play a role in tackling the pandemic crisis as well.
Back to 2022
Amidst the impact of the pandemic, the company posted a 15% fall in 2020 sales to $308 million as the company posted a small operating loss of $12 million. Revenues recovered by 16% in 2021, with revenues of $358 million being largely at par compared to 2019. On the bottom line, the company managed to squeeze out a $9 million operating profit for the year.
With 22 million shares trading at $27 in the fall of 2022, a market value of over $600 million included a near quarter of a billion net cash position, implying that expectations were low with operating asset trading just over $350 million, equal to about reported sales.
The company posted rather flattish sales in the first half of 2022, with declines seen on the margin front. The reality is that it as rather tricky for the company to deliver on its promises, as revenues were flattish in the $300 millions for a long period of time, with margins being rather non-existing.
Coming Down Further
Through the fall of last year, shares of Inogen had fallen to the $5 mark, having traded in a $6-$10 range so far this year. The reason for the continued fall in the shares is easily understood.
After revenues peaked at $377 million in 2022, revenues fell by 16% to $315 million in 2023. The problem is not just that sales are down, but the cost structure is the real issue, as operating losses of $109 million are huge, even if we factor in a $33 million impairment charge.
With 23 million shares trading in mid-single digits, and the company holding a net cash position of $128 million, that implies that operating assets were valued close to nothing, as investors were fearful that continued losses would simply eat into the net cash position.
For the final quarter of 2023, the company posted a 14% fall in quarterly sales to nearly $76 million, running at a run rate just in excess of $300 million, as quarterly operating losses of $29 million were still very substantial. While the first quarter guidance, calling for sales between $73-$74 million, looked soft, it would mark 1-3% growth on an annual basis.
In May, the company issued some upbeat comments, with first quarter sales reported up 8% to $78.0 million, comfortably coming in ahead of the guidance. On top of the sales growth, the company managed to grow gross margins a bit, while cutting operating expenses. The mix of all this meant that operating losses narrowed, although a $16.3 million loss remained substantial. This is key as the company has seen net cash holdings come down to $120 million.
In this sense, it is comforting that the company sees second quarter sales coming in at $81-$84 million, marking decent sequential growth. Unfortunately, no margin guidance has been provided, although in all likelihood is that losses likely come down a bit.
What Now?
The truth is that shares of Inogen have come under incredible pressure in recent years, amidst a lack of operating performance. Even at $8, operating assets of the business carry a less than $100 million operating asset valuation, a fraction of reported revenues.
While the results from the past couple of years do not give any reasons to be upbeat from a fundamental point of view, I am encouraged by the recent revenue growth, cost cuts, and narrowing losses.
Part of the increased momentum is driven by the exit of Philips from the portable oxygen concentrator market, but certainly the new management team in place has been a great contributor as well. The company has seen an acceleration as the new team unleashed some operating momentum. For the second quarter, I am keen to learn the progress being made on the bottom line.
Right now, the valuations are low enough that a speculative position might be contemplated, although this would be highly speculative. Before willing to consider the shares here, I am keen to learn more about the progress in the second quarter (and beyond), as I am anxiously awaiting second quarter results before making up this neutral stance.
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