2023-04-01 08:44:59 ET
Summary
- Cincinnati-based Medpace provides the biotechnology world with Phase 1-IV clinical development services using scientifically driven research.
- MEDP hit record Q4 2022 revenue of $394.1 million, indicating an increase of 27.7% (YoY), while full-year revenue of $1.46 billion represented a rise of 27.8% (Y/Y).
- MEDP FY 2022 financial results were in line with forecasts made in 2021.
- Medpace was able to deleverage its debt balance by 30.07% (QoQ) to $208.1 million in Q4 2022 devoid of long-term debt.
Medpace Holdings (MEDP) is up 13.58% (YoY) and is currently trading 23.06% below its 52-week high of $241.48. MEDP reported Q4 2022 revenue of $394.10 million +27.72% (Y/Y) beating estimates by $8 million and an EPS of $2.14 outpacing forecasts by $0.27. Ahead of its Q1 2023 financial report on April 24, 2023, MEDP announced that it had filed for an automatic shelf offering. According to the filing, MEDP indicated that it will not be receiving any proceeds from the sale of about 7.3 million common shares. I believe this sale will not lead to a greater dilution level since the shares in question had already been registered on the company's shelf and the company has ?31.1 million outstanding shares.
Thesis
Medpace reported strong earnings in Q4 2022 which are expected to be replicated beyond 2023 due to robust industry growth. The contract-research organization registered a 5.8% (Y/Y) increase in net new business awards in the quarter. MEDP expects total revenue for FY 2023 to grow 15.8% to 19.9% (YoY) with marginal capital expansion for growth.
Cincinnati-based Medpace provides the biotechnology world with Phase 1-IV clinical development services using scientifically driven research. As of December 31, 2022 it was operational in up to 40 countries where it has employed about 5,200 employees. MEDP has broadened its therapeutic specialty over the years to include cardiology, oncology, pediatrics, endocrinology, and anti-viral studies among others. The company indicated that it will be expanding its molecular/ flow cytometry structures to increase the chances of successful trials and regulatory approvals.
Financial results overview
As noted earlier, MEDP hit record Q4 2022 revenue of $394.1 million indicating an increase of 27.7% (YoY) while full-year revenue of $1.46 billion represented a rise of 27.8% (Y/Y). Quarterly EBITDA gained 30.9% (YoY) at $80.4 million and $308.1 million (full year) indicating a 38.1% (YoY) increase boosted by a slower headcount growth and strong workforce management.
The company's net income also stood at historic levels of $68.7 million in Q4 2022 and $245.4 million in full-year analysis, +34.9% (YoY). Despite the 8.71% (QoQ) decline in cash to $28.3 million, and $136.7 million in generated cash flow (from operating activities) MEDP was still able to repurchase about 228,000 shares for $47.2 million. Over the past 6 months, MEDP's share price has grown 19.65% boosted by this repurchase and a strong financial performance in the quarter.
Noteworthy is the fact that MEDP raised its FY 2023 guidance to the range of $1.65 billion-$1.75 billion or 15.8% (YoY) to 19.9% (YoY). In the year 2021, MEDP had forecast that they expected full-year revenue at $1.4 billion to $1.46 billion, or an increase of 22.6% to 27.8% (YoY). With the revenue now at $1.46 billion it shows that Medpace is on course to deliver another record year in 2023.
EBITDA is also expected to grow in the range of $325 million to $350 million or an increase of 5.5% to 13.8% (YoY) in comparison to $308.1 million recorded in 2022. A look at the EBITDA guidance for the year shows that MEDP will be considering expenditure growth in 2023. The company is also very optimistic about its business despite freezing hiring and expansion.
Building liquidity
The company was able to deleverage its debt balance by 30.07% (QoQ) to $208.1 million in Q4 2022 with no long-term debt. This is an impressive situation considering the company's main exposure is a credit facility of $50 million with an interest expense of $0.2 million.
Further, MEDP is open to building its cash levels from $28.1 million recorded in Q4 2022. We may not see additional share repurchase programs presumably until H2 2023. It will be important to observe how the volatility in the market prepares the company for such as opportunity especially since the stock is trading about 20% below its 52-week high.
MEDP's conversion rate in the quarter was 17.6% from a net new business award worth $485.1 million. This growth represented an increase of 5.8% (YoY) and a net book-to-bill ratio of 1.23X. The improvement in net-new business awards as a result of the revenue growth improved the net book-to-bill ratio from 1.49 in 2021 bringing the annual 2022 average to 1.25.
Valuation
MEDP's stock price complements the high-growth expectations with a forward price-to-earnings (P/E) ratio of 24.23. It is 13.08% lower than the industry average of 27.87. The forward price-to-sales ratio also stands at 3.41 about 17.21% lower than the industry average of 4.12. The stock somewhat appears expensive but has not been priced with unreasonable high-growth expectations. Further, the forward price-to-book ratio is 9.12 which may indicate the stock is slightly overvalued.
Risks to be considered
MEDP reported cancellations in the fourth quarter across various pipelines. Some of its backlogs were also affected by cancellations that were above 5% of its opening backlog in Q4 2022. The company noted that about 60% of its backlog (as of Q4 2022) was with clients that were not affiliated with large pharmaceutical companies. Since this backlog may not be directly related to the company's future net revenue then an increase in cancellation may lower MEDP's income levels.
Biotech sentiment since Q1 has been low due to limited or delayed financing. Low funding may affect project deployment and lead to a general downturn in 2023. MEDP has provided a hedge to its portfolio by diversifying its pipeline and prioritizing its clients based on asset quality and avoiding write-offs. As a contract-research company negotiating safe payment conditions remain an integral part of the company's logistics.
Bottom line
MEDP delivered a strong financial performance in Q4 2022 and FY 2022. The company remains confident in its 2023 guidance that will mark historical industry-growth expectations into 2024. Still, MEDP appears somewhat expensive amid the growth of backlog cancellations from its clientele. A decline in revenue in Q1 2023 may limit the company's chances of meeting its set guidance. However, this stock is worth watching ahead of its earnings release on April 24, 2023. For these reasons, I recommend a hold rating of the stock.
For further details see:
Medpace Holdings: Priced With High Expectations