MEDP Stock Study (3-28-23)

I recently did a stock study on Medpace Holdings Inc. (MEDP) with a closing price of $183.26.

CFRA writes:

     > Medpace Holdings, Inc. provides clinical research-based drug and
     > medical device development services in North America, Europe, and
     > Asia. It offers a suite of services supporting the clinical development
     > process from Phase I to Phase IV in various therapeutic areas. The
     > company also provides clinical development services to the
     > pharmaceutical, biotechnology, and medical device industries; and
     > development plan design, coordinated central laboratory, project
     > management, regulatory affairs, clinical monitoring, data management
     > and analysis, pharmacovigilance new drug application submissions, and
     > post-marketing clinical support services. In addition, it offers bio-
     > analytical laboratory services, clinical human pharmacology, imaging
     > services, and electrocardiography reading support for clinical trials.

This medium-sized company has grown sales and earnings at annualized rates of 21.3% and 30.1% (excluding NMF, $0.11, $0.37, and $0.98/share in ’14-’17, respectively, which if included would boost this number higher) for the last 10 years. Lines are up, straight, and parallel since ’15. PTPM was 14.3% in ’13 before dipping negative and recovering over the following three years. Since ’17, PTPM has increased from 13.1% to 19.4% with a last-5-year average of 16.6%. For the last 10 years, PTPM is about equal with the industry while trailing its peers as neither of the latter two suffered the ’14-’17 dip.

ROE increased from 2.5% in ’16 (initial ROE value on record) to 19.3% in ’21 before catapulting to 64.7% in ’22 (upside outlier). The last-5-year average (excluding ’22) is 15.7%, and as a whole this leads peer and industry averages—both of which cratered in ’17 (possibly due to TCJA). Debt-to-Capital declined from 47.8% in ’15 to 5.9% in ’19 before reversing higher to 32.8% in ’22. Overall, this is much lower than peer and industry averages. The last-5-year average is 15%. M* reports a Quick Ratio of 0.35, which [deserves a bit more digging and] on its own would be somewhat concerning. Value Line assigns a Financial Strength rating of B++ despite the company having no long-term debt.

I forecast long-term annualized sales growth of 11% based on the following:

• CNN Business projects 13.3% YOY and 12.5% per year for ’23 and ’22-’24, respectively (based on 3 analysts).
• YF projects YOY 17.3% and 13% for ’23 and ’24, respectively (5 analysts).
• Zacks projects YOY 16.7% and 14.1% for ’23 and ’24, respectively (2).
• Value Line projects 12% annualized growth from ’22-’27.
• CFRA projects 17.3% YOY and 15.1% per year for ’23 and ’22-’24, respectively (5).
• M* offers a 2-year ACE of 15% per year.

I am forecasting below the range.

I forecast long-term annualized EPS growth of 10% based on the following:

• CNN Business reports ACE of 6.6% YOY and 11.5% per year for ’23 and ’22-’24, respectively (based on 3 analysts), along with 5-year annualized growth of 12%.
• MarketWatch projects annualized growth of 13.9% and 15.1% for ’22-’24 and ’22-’25, respectively (5 analysts).
• Nasdaq.com projects 17.1% YOY for ’24 (2).
• YF projects YOY 6.6% and 16.6% for ’23 and ’24, respectively (5), along with 5-year annualized growth of 14.2%.
• Zacks projects YOY 5.4% and 17% for ’23 and ’24, respectively (2).
• Value Line projects 10.4% annualized growth from ’22-’27.
• CFRA projects 11.5% YOY and 14.7% per year for ’23 and ’22-’24, respectively (2).

I am forecasting below the three-long-term-estimate range (mean 12.2%).

My Forecast High P/E is 32. Excluding the upside outlier in ’16 (105.2), over the last six years high P/E has ranged from 32.4 in ’22 to 48 in ’21 with a last-5-year average of 37. I am forecasting below the range.

My Forecast Low P/E is 16. Excluding the upside outlier in ’16 (71.7), over the last six years low P/E has ranged from 15.3 in ’20 to 27.2 in ’21 with a last-5-year average of 18.8. I am forecasting near the bottom of the range (only ’20 is lower).

My Low Stock Price Forecast is the default value of $117.10. This is 36.1% less than the previous closing price and 7.7% less than the ’22 low.

These inputs land MEDP in the HOLD zone with an U/D ratio of 2.9. The Total Annualized Return (TAR) is 15.4%.

PAR (using Forecast Average, not High, P/E) is 9%. This is less than I want to see from a medium-sized company. If the margin of safety (MOS) is strong enough, then I can ignore PAR in favor of TAR.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 170 studies over the past 90 days (mine excluded), averages for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 15.9%, 15.6%, 31.8 and 18.9, respectively. I am significantly lower on growth rates and also lower on P/E range. MS high and low EPS are $14.75 and $6.69 compared to my $11.72 and $7.32. My low EPS may be greater than MS due the latest quarterly earnings release, and my high EPS is less due to a lower forecast growth rate. MS has a Low Stock Price Forecast of $125.38, which is 7.1% higher than mine.

As just suggested, my forecast average annual P/E (24) is just below MS (25.4) even though my Forecast High P/E is higher. Value Line projects much lower at 20. This is where I question the Value Line numbers. Going back in the statistical array, average annual P/E for ’19-’22 are 25.5, 27, 37.3, and 22.9. Looking back to the M* data I used, these same values are 25.3 (difference of -0.2), 27.3 (+0.3), 37.6 (+0.3), and 24.9 (+2.0). Unlike a few other companies on which I have run this analysis, Value Line here only understates by a mean of 0.6, which is not significant. My higher P/E range therefore offsets MOS created by my lower forecast growth rates.

I was uncharacteristically stretching with the P/E forecasts. Given my initial Forecast Low P/E, the Low Stock Price Forecast came up extremely far below the previous close. I therefore increased as high as I could while still maintaining justification to call it conservative.

Although MEDP is a BUY under $181, I may look for an even lower entry price to compensate for the lack of MOS. An additional reason to demand MOS in this study is uncertainty due to the lower number of analysts contributing to the above-cited projections and the lower number of long-term projections themselves.