Monash IVF Group Ltd's (ASX: MVF) shares plunged over 10% on Tuesday trade as side-effects from Virtus Health Ltd's (ASX: VRT) trading update took its toll on all in vitro fertisliation (IVF) providers.
Monash IVF was collateral damage as investors fear similar commentary from the IVF provider when it releases results on 20 February this year. This resulted in the stock being marked down on Tuesday.
Nonetheless, I believe the sell-off in Monash's shares may be unjustified. Here's why I think it is worth a closer look.
Virtus' update
Virtus' update revealed that slow domestic IVF cycles volumes are causing difficult trading conditions for the industry.
According to the trading update, Medicare data showed that second quarter fresh IVF cycle activity fell 6.0% compared to the prior year comparative period.
Consequently, Virtus experienced a 7.2% decrease in fresh cycle activity on a like-for-like basis. As a result, Virtus announced that unless volumes increase meaningfully over the second half, the current conditions are likely to have a material impact on its full-year financial results.
Although the slowing industry growth rate is a cause for concern, in my mind, Virtus' problems appear to be company specific.
Virtus announced it experienced a 7.2% drop in fresh cycle activity, whereas the market fell 6% over the same period.
Though management was quick to imply low-cost providers like Primary Health Care Limited (ASX: PRY) are to blame, I believe Virtus' underperformance is a product of uncompetitive pricing and management's mistakes.
Accordingly, though the sector's travails are nothing to be sneezed at, I think Tuesday's sell-off in Monash IVF presents an opportunity for long-term investors.
Monash IVF's outlook
Although increased competition and slowing growth is likely to have an impact on industry-wide profitability, Monash IVF looks set to buck this trend in my opinion.
At Monash IVF's AGM in November, management announced the company was on track to report first half profit growth (NPAT) of 7% on the prior corresponding period. This was despite a market decline of fresh IVF cycle of 3.5% (back then).
Whilst Virtus' announcement on Tuesday reveals the fresh IVF cycle's attrition has accelerated over the second quarter, Monash IVF's management looks set to navigate this trend by investing in ancillary services and expanding offshore.
Noting that both strategies carry their own risks, I believe management's flexibility and willingness to adapt makes the company worth a closer look following Tuesday's plunge.
Foolish takeaway
Whilst I am cognisant that slowing fresh IVF cycle rates are likely to have an impact on all market participants, I regard Monash IVF as being somewhat insulated against a protracted downturn in the industry.
With the company continuously on the lookout for additional domestic acquisitions of ancillary services, and set to increase its expansion offshore, I think Tuesday's price fall makes the stock one to buy.
