Infertility is a big problem—and that makes Progyny ’s stock a big opportunity.
The inability to have children isn’t a niche problem. About 19% of women ages 15 to 49 say they suffer from infertility, according to the Centers for Disease Control and Prevention, and that’s partly because they are choosing to have children later in life. Women 35 or older accounted for 19% of live births in the U.S. in 2019 compared with 14% in 2000, according to the CDC. That has meant more are turning to “assisted reproductive technology,” the jargon for fertility clinics and other methods to help women get pregnant. The number of fertility procedures and treatments has grown at an estimated annual rate of 26% a year since 2017, and should continue through the end of the decade, according to Barclays.
Progyny (PGNY / Nasdaq)
Fertility Benefits
| Headquarters | New York |
|---|---|
| Recent Price | $41.95 |
| YTD Change | -16.7% |
| Market Value (bil) | $3.9 |
| 2022E Sales (mil) | $752.5 |
| 2022E Net Income (mil) | $15.4 |
| 2002 EPS | $0.13 |
| 2022 P/E | 322.7 |
E=estimate
Source: FactSet
Enter Progyny (ticker: PGNY). The $3.8 billion market-cap company buys services from clinics and sells companies low-cost plans for those needing help with infertility. With coverage of such care limited in typical health-insurance plans, Progyny’s business has boomed, with the number of companies now offering its services more than doubling over the past seven years. Progyny is both profitable and growing fast. Its stock, however, has dropped 28% over the past six months as Covid-19 kept people from its clinics and investors sold off pricey growth stocks. That has created a buying opportunity.
“This is one of the fastest-growing healthcare-services companies,” says Alex Ely, chief investment officer of U.S. growth equity at Macquarie Asset Management and portfolio manager of the Delaware Smid Cap Growth fund (DFCIX), which has a nearly 5% stake in Progyny stock. “They’re a clear, pure-play leader in the fertility space.”
Employers don’t provide Progyny’s services out of the kindness of their hearts. With companies fighting for workers, better benefits are a key weapon. Many employers have also concluded that not providing such coverage could be considered discriminatory, notes a Barclays survey. Most health plans don’t offer solutions that work, however; Progyny fills the gaps.
Covid hasn’t been kind to Progyny. It limited the use of its services and resulted in sales of $500.6 million in 2021, missing analyst expectations for $508.3 million. In the final quarter of 2021, Progyny’s utilization rate—the percentage of customers who used a full Smart Cycle, or one cycle of treatment—was 0.46%. That slight miss drove the sales shortfall, says Dev Weerasuriya, an analyst at Berenberg. “What held the stock back was the quarterly swings in utilization,” he says.
Still, sales were up 45% from 2020, and are expected to continue to be strong, analysts predict, with 50% growth in 2022 and 39% in 2024. That makes sense, given the rate at which Progyny has been adding users. “New client adds are the main thing to pay attention to,” says Barclays’ Sarah James, who has an Overweight rating and a $80 price target on Progyny’s shares, up 91% from Thursday’s close of $41.95.
Progyny had four million members by the end of 2021’s fourth quarter, almost double a year earlier; that growth should also continue. The company said in a Securities and Exchange Commission filing when it went public in 2019 that it can gain 70 million customers over time. Many analysts assume a roughly 0.5% utilization rate and average spend on a Smart Cycle of about $20,000. Taken together, these numbers suggest a total addressable market of just over $7 billion a year. SVB Leerink analyst Stephanie Davis uses similar numbers and estimates the market at $6.7 billion soon, though she notes that it could be larger than that.
As membership grows, so should margins. Progyny expects to reduce sales and marketing expenses as a percent of revenue over time. It also won’t need to hire as many care coordinators, who will be able to handle more clients. The result: Earnings before interest, taxes, depreciation, and amortization, or Ebitda, margins are expected to expand to over 15% in 2025 from about 13% in 2021. Earnings per share should rise from $0.66 in 2021 to $2.49 in 2025, according to FactSet. “The growth profile for PGNY is unmatched,” says J.P. Morgan analyst Anne Samuel.
These expectations should help the stock grow into its valuation. It trades at 3.7 times expected sales in 2023 of just over $1 billion. But companies growing sales at this rate with increasing margins usually trade at higher multiples—even with interest rates rising. “It doesn’t deserve to trade here,” says SVB Leerink’s Davis. “How many names can you buy at that multiple with that growth profile?” She has a $59 price target on the stock, up 40% from Thursday’s close.
Write to Jacob Sonenshine at [email protected]
