This contract research company beat analysts’ EPS estimates by $0.18 last quarter and six analysts have recently increased their earnings forecasts for the company.
Medpace Holdings, Inc. (MEDP)
From Validea Hot List Newsletter
Strategy: Small-Cap Growth Investor
Based on: Motley Fool
Medpace Holdings, Inc. is a clinical contract research organization. The company partners with pharmaceutical, biotechnology, and medical device companies in the development and execution of clinical trials. The company’s drug development services focus on full service Phase I-IV clinical development services and include 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. Medpace also provides bio-analytical laboratory services, clinical human pharmacology, imaging services, and electrocardiography reading support for clinical trials. The company’s operations are principally based in North America, Europe, and Asia.
PROFIT MARGIN: PASS: This methodology seeks companies with a minimum trailing 12 month after tax profit margin of 7%. The companies that pass this criterion have strong positions within their respective industries and offer greater shareholder returns. A true test of the quality of a company is that they can sustain this margin. MEDP’s profit margin of 11.27% passes this test.
RELATIVE STRENGTH: PASS: The investor must look at the relative strength of the company in question. Companies whose relative strength is 90 or above (that is, the company outperforms 90% or more of the market for the past year), are considered attractive. Companies whose price has been rising much quicker than the market tend to keep rising. MEDP, with a relative strength of 91, satisfies this test.
COMPARE SALES AND EPS GROWTH TO THE SAME PERIOD LAST YEAR: PASS: Companies must demonstrate both revenue and net income growth of at least 25% as compared to the prior year. These growth rates give you the dynamic companies that you are looking for. These rates for MEDP (62.22% for EPS, and 25.84% for Sales) are good enough to pass.
INSIDER HOLDINGS: PASS: MEDP’s insiders should own at least 10% (they own 23.58%) of the company’s outstanding shares which is the minimum required. A high percentage typically indicates that the insiders are confident that the company will do well.
CASH FLOW FROM OPERATIONS: PASS: A positive cash flow is typically used for internal expansion, acquisitions, dividend payments, etc. A company that generates rather than consumes cash is in much better shape to fund such activities on their own, rather than needing to borrow funds to do so. MEDP’s free cash flow of $3.81 per share passes this test.
PROFIT MARGIN CONSISTENCY: PASS: MEDP’s profit margin has been consistent or even increasing over the past three years (Current year: 10.39%, Last year: 8.97%, Two years ago: 3.18%), passing the requirement. It is a sign of good management and a healthy and competitive enterprise.
R&D AS A PERCENTAGE OF SALES: PASS: MEDP is either maintaining the same levels of R&D expenditures (currently $0.0 million) or increasing these levels which is a good sign. This allows the company to develop the superior technology and new products that will put everyone else out of business. This criterion is particularly important for high-tech and medical stocks because they are so R&D dependent.
ACCOUNT RECEIVABLE TO SALES: PASS: This methodology wants to make sure that a company’s accounts receivable do not get significantly out of line with sales. It’s a warning sign if a company’s accounts receivable relative to sales increases significantly when compared to the previous year. Up to a 30% increase is allowed, but no more. Accounts Receivable to Sales for MEDP was 19.05% last year, while for this year it is 18.94%. Since the AR to sales is decreasing by -0.11% the stock passes this criterion.
LONG TERM DEBT/EQUITY RATIO: PASS: MEDP’s trailing twelve-month Debt/Equity ratio (0.00%) is at a great level according to this methodology because the superior companies that you are looking for don’t need to borrow money in order to grow.
“THE FOOL RATIO” (P/E TO GROWTH): PASS: The “Fool Ratio” is an extremely important aspect of this analysis. If the company has attractive fundamentals and its Fool Ratio is 0.5 or less (MEDP’s is 0.50), the shares are looked upon favorably. These high quality companies can often wind up as the biggest winners. MEDP passes this test.
AVERAGE SHARES OUTSTANDING: PASS: MEDP has not been significantly increasing the number of shares outstanding within recent years which is a good sign. MEDP currently has 37.0 million shares outstanding. This means the company is not taking any measures, with regards to the number of shares, that will dilute or devalue the stock.
John Reese, Validea Hot List Newsletter, www.validea.com, 877-439-0506, August 23, 2019