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How to start investing in the baby-making business

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The Fertility Society of Australia estimates that one in six couples of reproductive age suffer from infertility, yet only around 50% seek medical advice.

Of these, only around half get the specialist treatment they need, mainly on account of the extremely high cost of IVF and limited coverage by Medicare.

As the industry consolidates and becomes more tech focused, economies of scale get stronger, and IVF becomes cheaper. This will put IVF within reach for thousands of couples who are currently unable to afford it. There's still a huge untapped market for IVF, with potential to at least double the number of cycles performed each year.

This trend - in addition to the increasing prevalence of infertility due to women waiting longer to have children - should ensure demand for IVF grows materially over the next decade. We expect the three largest providers to take the lion's share of this growth - and increase their collective slice of the pie too.

ivf monash baby in vitro family parenting pregnancy

Monash IVF's management expects net profit to increase in the 2017 financial year, though it hasn't given specific guidance. The stock trades on a price-earnings ratio of 13 based on consensus estimates for 2017 earnings and we continue to recommend you HOLD.

Virtus's management didn't provide specific guidance for 2017 either but it did warn that volumes and margins are likely to be hurt in Queensland, where Primary Health Care has recently opened a bulk-billing clinic.

The stock sports a price-earnings ratio of 15 based on consensus estimates for 2017 earnings, a free cash flow yield of 8.2%, and a fully franked dividend yield of 5.3%. Virtus has a superior market position, with economies of scale, healthy returns on capital and it throws off plenty of cash.

We're happy to pay a slight premium for it relative to Monash and we're sticking with BUY.

This article contains general investment advice only (under AFSL 282288). To unlock more share research and buy recommendations from InvestSMART, take out a 15-day free membership.

Staff members may own securities mentioned in this article.

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Graham Witcomb is a senior analyst at Intelligent Investor (under AFSL 282288), owned by InvestSMART Group. Graham has a degree in psychology from the University of Sydney and is a Chartered Financial Analyst charterholder. He previously worked for one of the world's most successful professional gamblers, and joined InvestSMART in 2013 where he focuses on healthcare, insurance and transport infrastructure. To unlock Intelligent Investor stock research and buy recommendations, take out a 15-day free membership.
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