Share price falls are often the result of a piece of bad news or poor perceived impacts on a business from market conditions. But sometimes, the price will grind lower over time without the business fundamentals changing, and this can be a great time to buy a high-quality stock.
With Virtus Health Ltd shares (ASX: VRT) a long way from recent highs, its worth figuring out whether it's an opportunity to buy a great business at a discount.
A healthy business model?
Virtus operates at the other end of the healthcare spectrum to most companies that have recently listed on the stock market. There has been a raft of floats in the aged care space, but the business of Virtus is in helping couples create life through in-vitro fertilisation.
The technology for this amazing procedure is not protected by patent or trade secret, and was pioneered several decades ago. Therefore, Virtus reaches its potential clients through a network of doctors and clinics specialising in fertility services. The logic follows that the more doctors and clinics that Virtus is able to bring into its business, the more potential clients it can serve by selling IVF cycles.
The demographic tailwinds behind the company in Australia are being driven by families delaying having children until later in life. Medically speaking, the chances of conceiving naturally fall as age increases. This in turn, drives demand for assisted reproductive services.
Unhealthy future diagnosis
However, Virtus is a difficult business to "read". In the first year of its existence, its revenue and profits grew strongly. This growth was helped along by the addition of over a dozen doctors who specialised in fertility treatments. These doctors also brought their existing client bases with them.
However, Virtus has not been able to add anywhere near the same amount of doctors to its network in more recent times. This would be a little like a supermarket opening 20 new shopfronts in year one, but only being able to add four in year two. The result is a much slower rate of earnings growth in year two. It is obvious that earnings growth cannot continue at the same rate if the network does not support it, and that is exactly what has happened to Virtus.
More competition
Virtus is also under pressure in the same way that any other business can be: from competitors who can replicate its business model. In recent times, Monash IVF Group Ltd (ASX: MVF) and Primary Health Care Limited (ASX: PRY) have both been competing for market share. Primary in particular has updated the market of its intention to continue to expand its assisted reproduction services across the country, which means Virtus has a large, well-funded competitor pitted against it for a reasonably small number of potential clients.
Virtus Health has suffered a beating in recent times as the market became aware of these headwinds. It may be wise to wait until the next results to see where management has been able to counter the problems that have put a dent in the share price recently.
