Godji10
Medpace Holdings (NASDAQ:MEDP) is a contract research organization [CRO] that provides clinical development services to the biotechnology, pharmaceutical, and medical device segments of the market in the Asian, European and North American markets.
In its last earnings report it surprised the market to the upside, resulting in the share price of the company exploding from about $158.00 per share pre-report, to a 52-week high of $235.72 the next day. It has since pulled back to $222.00 per share as I write.
In this article we’ll dig into the report and the positive numbers it presented, as well as some of the concerns the company has over potential headwinds in 2023.
Latest earnings
Before getting into earnings, I do want to mention that I’ve thought for some time the biotech sector, in many cases, was beaten down more than it deserved, and it offered some great deals for patient investors.
As the latest earnings report from Medpace confirms, there is pent-up demand for companies showing strong performances. After falling over $100.00 per share from where it was a year ago, reaching a 52-week low of $126.945, the company is now trading at close to where it was on Nov. 1, 2022, after soaring over 41 percent last week.
For the quarter MEDP reported revenue of $383.7 million, a gain of 29.8 percent over the same quarter of 2021, beating Street estimates of about $357 million. Net income in the reporting period was $66 million, an increase of 35.8 percent year-over-year. Earnings per share smashed analysts’ expectations of $1.34 per share, finishing the quarter at $2.05.
One thing that was impressive for the company was the fact it won $470.9 million in new business during economic conditions that usually are more difficult to receive funding. Last year it attracted $408 million in new business in the same reporting period.
After the strong quarterly results the company increased its full-year revenue expectations to approximately $1.45 million, up 27 percent from 2021. Before that it had looked for revenue to grow by about 24 percent.
The company also guided for EBITDA be in a range of $302 million and $310 million, net income between $232 million and $236 million, and EPS from $6.88 and $7.
MEDP grew its backlog to $2.2 million at the end of September, a gain of 21 percent.
Management also stated it had authorized share buybacks of up to $500 million.
Guidance for 2023 includes revenue growth of around 18 percent to $1.7 million, based upon the average of its projected range. Adjusted earnings is expected to be $338 million in 2023.
The company ended the quarter with only $31 million in cash, a significant drop from the $461.3 million it had on Dec. 31, 2021. That is definitely a concern, but it could be mitigated some by an increase in cash flow from the expected rise in earnings. If it plays out that way, it will add to its cash position.
Potential slowdown
One thing CEO August Troendle mentioned in the earnings report was that he was concerned about the possible impact of a major financial downturn in 2023, if that’s how it plays out. He also added that if it isn’t as bad as some investors are thinking, the guidance the company gave will beat expectations.
While the general market consensus is the recession is likely to get deeper next year, we really have no idea if that’s how it’s going to play out. I think there’s more of a chance things are going to get worse before they get better, but it depends upon the decisions by the Federal Reserve concerning interest rates for the remainder of 2022, and its commentary on how it views 2023; especially in the first quarter of the year.
I think the top interest rate the Fed will allow will be at 5 percent. At worst, it may be slightly above that, but it’s not going to go much higher or else the U.S. government will find it extremely difficult to pay down its $31 trillion in debt with interest rates that high. The market is waiting for confirmation of an interest rate ceiling, and when that happens, there will be a positive response from investors, which will bring a lot of capital into riskier stocks like MEDP.
As management stated, if the economy holds up better in 2023, the company will surpass guidance and expectations, resulting in outperformance going forward.
We’re not likely to get clarity on this for about a month from now, after the December announcement by the Fed.
How to play Medpace
With the big runup in its share price, taking a position in Medpace now doesn’t have a lot of upward room to grow in the near term. Like mentioned earlier, it’s now trading flat from where it was a year ago, even though it has recovered nicely from its 52-week low.
As I see it, much of its performance is already priced in, and with uncertainty surrounding economic conditions in 2023, there is a lot more risk now at these entry points than there was just a week ago.
And as management suggested with economic concerns in 2023, the performance of the company could go either way, although it does have more support with the reported backlog it has.
I believe the best way to play Medpace at this time is to wait for its share price to pull back to a lower entry point. I think with its performance and guidance that shareholders will enjoy higher lows than it experienced throughout 2022, but it’s questionable how much higher MEDP can go in 2023, based upon the information we have now concerning what the Fed will do, and how much economic growth will slow in 2023.
The major issue there is whether or not its customer base, which is primarily made up of smaller medical equipment and pharmaceutical companies, will have the capital available to pay for MEDP’s services. Obviously, many will, but a lot of them may struggle to obtain capital if the economy crashes in 2023. This is a major part of the reason the company guided for slower growth next year.
MEDP will have to sustainably break through the $240.00 per share mark to signal the potential for the share price has the potential to go much higher. But with it already enjoying a move of over $65.00 per share over a very short time, I’m thinking it needs to take a breather and pull back to be attractive to investors.
Conclusion
There’s a lot to like on the performance of MEDP, as it continues to boost revenue quarter after quarter while improving earnings. But we’re coming to the apex of the economic crises now, and until there is more clarity from the Fed and economic numbers over the next couple of months, it’s going to be difficult to make conviction trade on MEDP, especially after it has likely priced in much of 2023’s growth.
Where there is upside potential over the next year is in regard to the economy doing better than expected, and the degree to which the Fed pivots.
As for risk/reward, it’s far less attractive now than a short time ago when the market rapidly bid the share price of MEDP up. I don’t think there’s a lot of upside left for now, and the best way to take a position is on big dips in its share price.
Like I said earlier, I do think with the backlog and guidance that the company has a higher floor now than it did for much of 2022, but that doesn’t mean it can’t take a big and prolonged dip at a much weaker share price range than it stands today.
Again, a lot is already priced in, so the likelihood of being underwater with the stock for a prolonged period of time if investor buy at current price levels, is much higher than it has been for the last year.
MEDP has a lot of long-term potential for patient investors, but my conclusion is it would be best to wait for a downturn, and if there is an increase in share price, I would resist chasing because there is almost certainly going to be an eventual pullback in the share price, which will provide a far more attractive entry point.
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