The shock profit warning by Virtus Health Ltd (ASX: VRT) has sent the stock plummeting to a record low this morning as investors wonder if Monash IVF Group Ltd (ASX: MVF) is next in line to downgrade its outlook.
Shares in Virtus crashed a further 2.9% to $5.95 after it shed 20% of its value yesterday. Fellow fertility treatment provider Monash IVF fell 5% in sympathy on Tuesday and gave up another 1 cent this morning to $1.49.
Virtus blames loss of in vitro fertilisation (IVF) market share in New South Wales with Primary Health Care Limited (ASX: PRY) entering that market with a low cost bulk-billed offering, the closure of its Maroubra clinic in Sydney due to severe storms in April, bigger than expected losses from its Singapore start-up and general lacklustre demand for reproductive services in other states like Victoria and Queensland.
You can read more details of Virtus' profit warning here, but I believe fears that Monash will suffer the same de-rating are overblown.
I am not saying Monash is immune to general weakness in the market, but many of the factors that have contributed to Virtus' sombre outlook do not really apply to Monash.
Monash won't be as badly impacted by Primary Health Care's entry into NSW as its business is under-represented in that market. Monash is primarily focused in Melbourne, Adelaide and Malaysia.
Monash did acquire a business in Sydney but the clinics it took over relate to diagnostic services and not IVF. Monash does run a few IVF clinics in that state and they are generally low-cost facilities themselves so the loss of market share to Primary may not be as severe as Virtus with its full service clinics.
What's more, Monash's Malaysian operations are established and regarded as the market leader in that country, while Virtus' Singapore expansion is "greenfield".
Perhaps the thing that gives me greatest comfort is that Monash wasn't trading at a premium to the market before the bad news broke – and that's unlike Virtus.
The share fall in Virtus' share price puts the stock on a 2015-16 consensus price-earnings (P/E) multiple of around 13x, which is still a tad ahead of Monash at 12.6x.
Analysts are divided on what to do with Virtus with some upgrading or reiterating their buy call on the stock while others have downgraded Virtus.
I think Virtus represents longer-term value but shareholders lacking conviction should sell Virtus and buy Monash.
