Although the S&P 500 is down 2.1% over the past six months, Progyny’s stock price has fallen further to $17.17, losing shareholders 16.6% of their capital. This was partly driven by its softer quarterly results and might have investors contemplating their next move.
Is now the time to buy Progyny, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is Progyny Not Exciting?
Even though the stock has become cheaper, we don't have much confidence in Progyny. Here are two reasons why PGNY doesn't excite us and a stock we'd rather own.
1. Fewer Distribution Channels Limit its Ceiling
Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.
With just $1.29 billion in revenue over the past 12 months, Progyny is a small company in an industry where scale matters. This makes it difficult to build trust with customers because healthcare is heavily regulated, complex, and resource-intensive.
2. New Investments Fail to Bear Fruit as ROIC Declines
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. On average, Progyny’s ROIC decreased by 3.5 percentage points annually each year over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
Final Judgment
Progyny’s business quality ultimately falls short of our standards. Following the recent decline, the stock trades at 8.9× forward P/E (or $17.17 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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