MEDP Stock Study (5-30-23)

I recently did a stock study on Medpace Holdings Inc. (MEDP) with a closing price of $203.55. My original MEDP study is here.

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-size 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 decade, 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 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). Historical uptrends in both PTPM and ROE are positive signs of economic moat.

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. Last-5-year average is 15.0% and the company has no long-term debt.

The only stick in the mud I see with regard to liquidity ratios is a Quick Ratio (QR) of 0.35. Value Line assigns a Financial Strength rating of B++. A closer look at the 2022 10-K confirms QR, which is chiefly due to two factors. First, advanced billings increased 34%. This means the company got paid upfront: not a bad thing. Second, cash and cash equivalents fell 94%. The report explains this was “due primarily to share repurchases.” On p.29, the company explains repurchase of 5,463,244 + 228,247 shares = 5,691.491 shares under two repurchase programs. I’m not sure why this is so much more than the 1,090,000-share decrease reported by Value Line for ’22, but I can see they have been repurchasing shares.

I forecast long-term sales growth of 11.0% based on the following:

• CNN Business projects 20.0% YOY and 15.5% per year for ’23 and ’22-’24, respectively (based on 4 analysts).
• YF projects YOY 21.6% and 12.0% for ’23 and ’24, respectively (5 analysts).
• Zacks projects YOY 20.9% and 11.5% for ’23 and ’24, respectively (2).
• Value Line projects 12.7% annualized growth from ’22-’27.
• CFRA projects 21.6% YOY and 16.7% per year for ’23 and ’22-’24, respectively (5).
• M* offers a 2-year ACE of 16.5% per year.

I am forecasting below the range.

I forecast long-term annualized EPS growth of 10.0% based on the following:

• CNN Business reports ACE of 12.6% YOY and 13.3% per year for ’23 and ’22-’24, respectively (based on 4 analysts), along with 5-year annualized growth of 12.0%.
• MarketWatch projects annualized growth of 15.8% and 14.7% for ’22-’24 and ’22-’25, respectively (5 analysts).
• Nasdaq.com projects 13.3% YOY and 7.0% per year for ’24 and ’23-’25 [2, 2, and 1 analyst(s) for ’23, ’24, and ’25].
• YF projects YOY 12.6% and 14.0% for ’23 and ’24, respectively (5), along with 5-year annualized growth of 14.2%.
• Zacks projects YOY 11.4% and 13.3% for ’23 and ’24, respectively (2).
• Value Line projects 10.4% annualized growth from ’22-’27.
• CFRA projects 15.5% YOY and 15.1% per year for ’23 and ’22-’24, respectively (3).

I am forecasting below the long-term-estimate range (mean of three: 12.6%). My initial value will be ’22 EPS of $7.28/share rather than Q1 ’23 EPS of $7.90 (annualized).

My Forecast High P/E is 27. Excluding the upside outlier in ’16 (105), high P/E over the last six years has ranged from 32.4 in ’22 to 48.0 in ’21 with a last-5-year average of 37.0. I am forecasting below the last-5-year-average average P/E of 27.9.

My Forecast Low P/E is 16. Excluding the upside outlier in ’16 (71.7), low P/E over the last six years 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 (LSPF) is the default value of $116.50 (based on $7.28/share initial EPS). This is 42.8% less than the previous closing price and 8.2% less than the ’22 low of $126.90.

These inputs land MEDP in the HOLD zone with an U/D ratio of 1.3. Total Annualized Return (TAR) is 9.2%.

PAR (using Forecast Average—not High—P/E) is 4.4%, which is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 226 studies over the past 90 days (my study and 61 outliers excluded), averages for projected sales growth, EPS growth, Forecast High P/E, and Forecast Low P/E are 14.5%, 13.7%, 30.0, and 17.0, respectively. I am lower across the board. Value Line has a projected average annual P/E ratio of 20.0, which is lower than MS (23.5) and mine (21.5).

MS high and low EPS are $14.56/share and $7.32/share in contrast to my $11.72 and $7.28. My high EPS is probably lower due to a lower growth rate.

MS LSPF of $127.00 is very close to the $7.32 * 17.0 = $124.44 default value. It’s also 9.0% greater than mine.

PEG ratio is another value check that I will start tracking. My forward PEG is 21.5 / 10 = 2.2. A generally accepted upper limit is 1.0 – 1.5, but it’s also good to compare against the industry average [for which I don’t have a number].

MOS seems decent in the current study, but the stock is too expensive now. I would look to re-evaluate under $166/share.