Equity Research
Progyny : Another Blow to the Story; Lowering Our Model & PT for Significant Client Termination
September 19, 2024
Progyny : Another Blow to the Story; Lowering Our Model & PT for Significant Client Termination
Progyny : Another Blow to the Story; Lowering Our Model & PT for Significant Client Termination
This document is being provided for the exclusive use of katherine@mavenclinic.com.
18 September 2024

Progyny

Another Blow to the Story; Lowering Our Model & PT for Significant Client Termination

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Overweight

PGNY, PGNY US

Price (18 Sep 24):$24.44

▼Price Target (Dec-25):$22.00

Prior (Dec-25):$31.00

Key Changes (FYE Dec)

Prev Cur
Revenue - 25E ($ mn) 1,352 1,231
Adj. EBITDA - 25E ($ mn) 233 212

Quarterly Forecasts (FYE Dec)

Adj. EBITDA  ($ mn)
2023A 2024E 2025E
Q1 46 50A
Q2 47 54A
Q3 50 49
Q4 43 46
FY 187 200 212

Style Exposure

Sources for: Style Exposure – J.P. Morgan Quantitative and Derivatives Strategy; all other tables are company data and J.P. Morgan estimates.

PGNY faced another blow to the model today, as they announced that a large client plans to terminate its services agreement with the company. The client represented roughly 13% of 2023 revenue ($130M), and 670k lives, and the termination will become a detriment to the model beginning in January 2025. Removing this client from our model reduces our 2025 revenue estimate by $120M and our EBITDA by $21M, resulting in a 2025 growth profile of MSD revenue and EBITDA growth for 2025, well below the LT targeted range of 20% revenue growth and 25% EBITDA growth. It’s worth noting that while we doubt they will be able to find a client as large as 670K lives again, our model had only been embedding 1M incremental lives prior to today’s announcement vs. the LT targeted 1.2M per year. While PGNY did not disclose the client, due to the magnitude of lives lost, we believe it is potentially Amazon, which comprised ~15% of PGNY’s revenue in 2019 (the last time it was broken out in public filings). It is also worth noting that we believe this is likely a competitive loss versus the client exiting fertility benefits, an important distinction when discussing the health of the fertility market (both negative in the NT for PGNY). This bad news follows a series of difficult quarterly results for PGNY and likely compounds the strained investor perception of some of the unexplained utilization issues. As a result of our lowered model, we are reducing our Dec 2025 price target to $22 from $31, based on a 7x EV/EBITDA multiple, a 50% discount to PGNY’s forward growth profile to account for the lack of visibility on utilization issues. Where do we go from here? The next significant datapoint we are awaiting for our thesis will be the results of the current selling season which we expect PGNY to report on the 3Q print in the coming weeks.

  • We are lowering our 2025 revenue estimate by ~$120M to account for the lost client. Removing 670K lives from our model results in ~330M incremental new lives added in 2025. This is the net of our original estimate for 1M lives added in the 2024 selling season less the significant client loss. Keeping utilization assumptions the same, this equates to 5.6% revenue growth in 2025 to $1,231M vs. our 2024 revenue estimate of $1,165M which remains unchanged given the timing.
  • We are lowering our 2025 EBITDA estimate by ~$21M. Applying a high teens margin (in line with current profile) to the $120M of lost revenue results in a $21M EBITDA reduction in our model to $212M in 2025. This reduction is <12% as mgmt noted that the EBITDA contribution from this client was smaller than the revenue contribution. Our revised estimates imply 5.7% EBITDA growth in 2025 over our 2024 estimate of $200M.

Price Performance

YTD 1m 3m 12m
Abs -33.2% 18.0% -7.1% -27.4%
Rel -42.0% 15.0% -16.1% -47.7%

Company Data

Shares O/S (mn) 95
52-week range ($) 42.08-19.60
Market cap ($ mn) 2,327.20
Exchange rate 1.00
Free float(%) 84.9%
3M - Avg daily vol (mn) 1.38
3M - Avg daily val ($ mn) 33.8
Volatility (90 Day) 51
Index RUSSELL 2000
BBG BUY|HOLD|SELL 7|4|0

Key Metrics (FYE Dec)

$ in millions FY23A FY24E FY25E FY26E
Financial Estimates
Revenue 1,089 1,165 1,231 1,468
Adj. EBITDA 187 200 212 261
Adj. EBIT 62 67 78 139
Adj. net income 141 154 149 176
Adj. EPS 1.40 1.57 1.49 1.71
BBG EPS 0.60 1.47 1.66 1.97
Cashflow from operations 189 155 177 194
FCFF 185 152 173 189
Margins and Growth
Revenue Growth Y/Y (%) 38.3% 7.0% 5.6% 19.3%
EBITDA margin 17.2% 17.2% 17.2% 17.7%
EBITDA Growth Y/Y (%) 48.8% 7.0% 5.7% 23.1%
EBIT margin 5.7% 5.7% 6.3% 9.5%
Net margin 12.9% 13.2% 12.1% 12.0%
Adj. EPS growth 57.2% 12.1% (5.3%) 15.3%
Ratios
Adj. tax rate 12.2% 30.5% 22.0% 22.0%
Interest cover NM NM - -
Net debt/Equity NM NM NM NM
Net debt/EBITDA NM NM NM NM
ROCE 11.7% 7.1% 7.3% 10.4%
ROE 30.3% 23.7% 17.8% 16.8%
Valuation
FCFF yield 7.5% 6.3% 7.1% 7.5%
Dividend yield - - - -
EV/Revenue 2.1 1.8 1.6 1.2
EV/EBITDA 12.1 10.6 9.2 6.7
Adj. P/E 17.4 15.6 16.4 14.3

Summary Investment Thesis and Valuation

Investment Thesis

Progyny is a data-driven fertility benefits provider with a differentiated model in a large and growing fertility market. With expectations for 460 clients by 2024 year end, the company is minimally penetrated relative to the 8,000 self-insured employers it views as addressable, leaving significant runway ahead. PGNY has a rapid growth profile, and we model a ~13% revenue CAGR over the next three years, with scale driving EBITDA margin expansion to high teens over that time.

Valuation

We are lowering our December 2025 PT to $22 (Dec PT of $31 prior) based on a 7x multiple on our updated CY2026 EBITDA estimate. This equates to a 0.50x EV/EBITDA/Growth multiple, a discount to the Healthcare IT average given uncertainty in the near term.

Performance Drivers

Source: J.P. Morgan Quantitative and Derivatives Strategy for Performance Drivers; company data, Bloomberg Finance L.P. and J.P. Morgan estimates for all other tables. Note: Price history may not be complete or exact.

Investment Thesis, Valuation and Risks

Progyny (Overweight; Price Target: $22.00)

Investment Thesis

Progyny is a data-driven fertility benefits provider with a differentiated model in a large and growing fertility market. With expectations for 460 clients by 2024 year-end, the company is minimally penetrated relative to the 8,000 self-insured employers it views as addressable, leaving significant runway ahead. PGNY has a rapid growth profile, and we model a ~13% revenue CAGR over the next three years, with scale driving EBITDA margin expansion to high teens over that time.

Valuation

We are lowering our December 2025 PT to $22 (Dec PT of $31 prior) based on a 7x multiple on our updated CY2026 EBITDA estimate. This equates to a 0.50x EV/EBITDA/Growth multiple, a discount to the Healthcare IT average given uncertainty in the near term.

Risks to Rating and Price Target

Economic environment and employment. Progyny sells its product to self-insured employers as a component of overall medical benefits. In the event of a weaker economic environment, or higher unemployment, Progyny could see reduced penetration of the market and potentially reduced utilization of the product.

Competitive environment. Progyny has many competitors in the fertility benefits space, including large national insurance carriers. Increased competition as the demand for fertility benefits grows could make it difficult to capture share.

Customer concentration. Progyny has ~460 clients, and its top two largest clients have contributed a combined 26% of revenue in 2023. While we expect the diversity of its revenue base to increase as the company grows, the loss of one of these large clients could meaningfully reduce current and projected revenues and profitability.

Ability to integrate with insurance carriers. Progyny is able to integrate its benefits solution with all of the large national health insurance carriers with which it competes. If this ability to integrate were to change, or if there are changes to the regulatory environment for the private health insurance industry, it could negatively impact the business.

New client wins may not materialize as expected. Should PGNY not grow its client base as we are modeling, revenue and EBITDA margin expansion may differ from our projections.

Pharmacy benefit plan has separate regulatory and distribution risks. Progyny manages medications related to the fertility pharmacy solution to offer an integrated treatment and medication experience. Risks to this business include weaker than expected underlying prescription drug utilization growth, competitive pricing pressure, and an adverse legal/regulatory ruling around rebates.

Progyny: Summary of Financials
Income Statement - Annual FY22A FY23A FY24E FY25E FY26E
Revenue 787 1,089 1,165 1,231 1,468
COGS (620) (850) (909) (953) (1,119)
Gross profit 167 239 256 277 349
SG&A (144) (177) (189) (199) (210)
Adj. EBITDA 126 187 200 212 261
D&A (2) (2) (3) (3) (4)
Adj. EBIT 23 62 67 78 139
Net Interest 1 5 4 0 0
Adj. PBT 24 71 85 78 139
Tax 6 (9) (26) (17) (31)
Minority Interest - - - - -
Adj. Net Income 89 141 154 149 176
Reported EPS 0.30 0.62 0.60 0.61 1.06
Adj. EPS 0.89 1.40 1.57 1.49 1.71
DPS - - - - -
Payout ratio - - - - -
Shares outstanding 100 101 98 100 103
Balance Sheet & Cash Flow Statement FY22A FY23A FY24E FY25E FY26E
Cash and cash equivalents 120 97 249 422 612
Accounts receivable 240 242 280 308 382
Inventories - - - - -
Other current assets 74 301 301 301 301
Current assets 434 640 830 1,031 1,295
PP&E 8 10 11 11 12
LT investments - - - - -
Other non current assets 101 106 106 106 106
Total assets 543 757 947 1,149 1,413
           
Short term borrowings 0 0 0 0 0
Payables 109 125 128 135 162
Other short term liabilities 50 61 58 62 73
Current liabilities 160 186 186 197 235
Long-term debt 0 0 0 0 0
Other long term liabilities 6 17 17 17 17
Total liabilities 166 203 204 214 252
Shareholders' equity 377 553 743 934 1,161
Minority interests - - - - -
Total liabilities & equity 543 757 947 1,149 1,413
BVPS 3.77 5.50 7.58 9.30 11.27
y/y Growth 50.1% 45.8% 37.9% 22.7% 21.2%
Net debt/(cash) (120) (97) (249) (422) (612)
           
Cash flow from operating activities 80 189 155 177 194
o/w Depreciation & amortization 2 2 3 3 4
o/w Changes in working capital (59) (17) (37) (18) (36)
Cash flow from investing activities (44) (201) (3) (4) (4)
o/w Capital expenditure (3) (4) (3) (4) (4)
as % of sales 0.4% 0.3% 0.3% 0.3% 0.3%
Cash flow from financing activities (8) (11) 0 0 0
o/w Dividends paid - - - - -
o/w Net debt issued/(repaid) 0 0 0 0 0
Net change in cash 29 (23) 152 173 189
Adj. Free cash flow to firm 77 185 152 173 189
y/y Growth 222.7% 140.0% (18.0%) 14.1% 9.3%
Income Statement - Quarterly   1Q24A 2Q24A 3Q24E 4Q24E
Revenue   278A 304A 290 292
COGS   (216)A (236)A (227) (231)
Gross profit   62A 68A 64 62
SG&A   (44)A (48)A (48) (49)
Adj. EBITDA   50A 54A 49 46
D&A   (1)A (1)A (1) (1)
Adj. EBIT   19A 21A 15 12
Net Interest   3A 1A 0 0
Adj. PBT   23A 25A 17 20
Tax   (6)A (9)A (6) (6)
Minority Interest   - - - -
Adj. Net Income   39A 43A 34 38
Reported EPS   0.17A 0.17A 0.12 0.15
Adj. EPS   0.39A 0.43A 0.35 0.39
DPS   - - - -
Payout ratio   - - - -
Shares outstanding   101A 98A 96 97
Ratio Analysis FY22A FY23A FY24E FY25E FY26E
Gross margin 21.3% 21.9% 22.0% 22.5% 23.8%
EBITDA margin 16.0% 17.2% 17.2% 17.2% 17.7%
EBIT margin 3.0% 5.7% 5.7% 6.3% 9.5%
Net profit margin 11.3% 12.9% 13.2% 12.1% 12.0%
           
ROE 28.3% 30.3% 23.7% 17.8% 16.8%
ROA 19.8% 21.7% 18.1% 14.3% 13.8%
ROCE 5.6% 11.7% 7.1% 7.3% 10.4%
SG&A/Sales 18.3% 16.2% 16.2% 16.2% 14.3%
Net debt/equity NM NM NM NM NM
           
P/E (x) 27.4 17.4 15.6 16.4 14.3
P/BV (x) 6.5 4.4 3.2 2.6 2.2
EV/EBITDA (x) 17.8 12.1 10.6 9.2 6.7
Dividend Yield - - - - -
           
Sales/Assets (x) 1.7 1.7 1.4 1.2 1.1
Interest cover (x) NM NM NM - -
Operating leverage (48.7%) 434.1% 102.9% 300.7% 406.6%
           
Revenue y/y Growth 57.2% 38.3% 7.0% 5.6% 19.3%
EBITDA y/y Growth 86.6% 48.8% 7.0% 5.7% 23.1%
Tax rate 24.2% 12.2% 30.5% 22.0% 22.0%
Adj. Net Income y/y Growth (10.5%) 58.3% 9.2% (2.9%) 18.1%
EPS y/y Growth (10.3%) 57.2% 12.1% (5.3%) 15.3%
DPS y/y Growth - - - - -
           
           
           
           
           
           
           
           
           
           
Source: Company reports and J.P. Morgan estimates.
Note: $ in millions (except per-share data).Fiscal year ends Dec. o/w - out of which

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Important Disclosures

  • Market Maker: J.P. Morgan Securities LLC makes a market in the securities of Progyny.
  • Market Maker/ Liquidity Provider: J.P. Morgan is a market maker and/or liquidity provider in the financial instruments of/related to Progyny.
  • Client: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as clients: Progyny.
  • Client/Non-Securities-Related: J.P. Morgan currently has, or had within the past 12 months, the following entity(ies) as clients, and the services provided were non-securities-related: Progyny.
  • Potential Investment Banking Compensation: J.P. Morgan expects to receive, or intends to seek, compensation for investment banking services in the next three months from Progyny.
  • Debt Position: J.P. Morgan may hold a position in the debt securities of Progyny, if any.

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Date Rating Price ($) Price Target ($)
22-Oct-21 OW 61.27 79
10-Mar-22 OW 45.67 74
08-Aug-22 OW 41.15 78
18-Nov-22 OW 33.42 62
10-Mar-23 OW 32.41 61
12-May-23 OW 36.48 58
06-Oct-23 OW 33.33 57
20-Nov-23 OW 32.20 49
07-Mar-24 OW 33.63 51
15-May-24 OW 27.48 41
19-Aug-24 OW 21.04 31

The chart(s) show J.P. Morgan's continuing coverage of the stocks; the current analysts may or may not have covered it over the entire period. J.P. Morgan ratings or designations: OW = Overweight, N= Neutral, UW = Underweight, NR = Not Rated

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Coverage Universe: Samuel, Anne E : Consensus Cloud Solutions (CCSI), Definitive Healthcare (DH), Doximity (DOCS), Evolent Health (EVH), Health Catalyst (HCAT), HealthEquity (HQY), IQVIA Holdings Inc (IQV), Omnicell (OMCL), Phreesia (PHR), Premier, Inc. (PINC), Progyny (PGNY), R1 RCM (RCM), Veeva Systems (VEEV), Veradigm (MDRX), Waystar (WAY)

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Completed 18 Sep 2024 09:57 PM EDTDisseminated 18 Sep 2024 09:59 PM EDT