Medpace Holdings, Inc. (NASDAQ:MEDP), which has been gaining momentum since late June, announced positive Q2 FY22 earnings.
In the current macro landscape, Medpace exhibits various positive traits, and this most recent set of earnings gives the risk/reward equation even more optimistic weight.
Medpace Builds Momentum
Medpace reported strong Q2 results with gains in revenue and operating profitability. Substantial revenue came in at $351 million, above the planned 26 percent YoY growth.
The value of new business wins in Q2 increased by 16 percent year over year to $450 million. Overall, this yields a book-to-bill ratio of 1.3.
Additionally, the final backlog at the end of Q2 was $2.2 billion, an increase of 24% year over year.
Management anticipates that $1.15 billion ($35/share) of this backlog will be converted to the top line during the next 12 months, representing 52 percent of the total, lagging somewhat behind Q2 conversion of 17 percent.
The top-line increase of 26% translated into a quarterly operating margin of 17.1% ($2.70/share), which was in line with a sequential decline of 210bps in Q2 FY21.
While Medpace (NASDAQ:MEDP) posted $135 million ($4.35/share) in CFFO this quarter, a 65 percent YoY increase, capital expenditures were roughly $15 million, in line with historical trends.
As a result, the business drove FCF of $120 million ($3.88/share), a rise of more than 62 percent year over year, and a 34 percent increase in turnover, below the bottom line. Investors now understand that this has a 4.5 percent FCF yield.
Additionally, Medpace (NASDAQ:MEDP) routinely generates a return on capital, and this quarter was no different, with ROIC exceeding 30% of net operating profit after taxes (“NOPAT“).
The company’s ROIC/WACC ratio is 2.02. This shows excellent capital management, and in FY22, investors are willing to pay a premium for it.
Medpace Also Finished its Buyback Program
That accomplishment ended up rewarding shareholders in the process. Three million shares were bought back at an average cost of $137.86. Thus YTD, it has bought back 5.5 million shares or about 15% of the outstanding ordinary stock at the end of 2021. It no longer has any unused share repurchase authorization.
Given that both ROA and ROIC are increasing, Medpace has many options for returning excess money to shareholders through actions like more buybacks. It also exhibits a resilient quality, which is a very obvious goal for FY22.
Medpace (NASDAQ:MEDP) consequently contributes a significant amount of fundamental momentum. The management now projects full-year revenue growth of about 25%, with the highest estimate being $1.4-$1.435 billion. Additionally, it anticipates GAAP EBITDA of up to $280 million and EPS between $6.07 and $6.36.
It’s No Wonder Many Analysts See Medpace as a Buy
Shares are currently priced at 5.3 times book value and 33 times trailing P/E. The stock is priced at 40x FCF and investors are paying almost 4x sales. MEDP is priced more than GICS industry peers across key multiples. It doesn’t scream relative value when solid companies like Avantor Inc. (NYSE:AVTR) and Thermo Fisher (NYSE:TMO) are trading at about 5x book value.
Investors must examine Medpace (NASDAQ:MEDP) from the standpoint of long-term cash compounders to really see the big picture.
Considering that investors would hypothetically be paying $155 at 40x P/FCF, many analysts believe there may be room for upside. Even while this price asymmetry is slight, it also shows that the stock may be trading below cash-based valuation standards. Due to this, some analysts have set the price of MEDP at $157.
Already the shares are currently moving north and toward a long-term resistance level. Some analysts are even pointing to an upside goal of $186 per share for the stock now.
The Bottom Line
Following a strong set of Q2 FY22 earnings, Medpace (NASDAQ:MEDP) appears on track to provide a disproportionate return.
The company’s core momentum, especially its capacity for long-term cash compounding, appeals to many. Additionally, it routinely produces a strong return on its capital investments and has appealing profitability numbers.
Featured Image: Megapixl @Buchachon
