This healthcare company beat analysts’ earnings estimates by $0.07 last quarter, and is on target for double-digit growth in the next five years.
PRA Health Services (PRAH)
From Cabot Stock of the Week
As a growth investor, I’m always on the lookout for companies with revolutionary new products or services. At the same time, it’s important not to overlook companies with solid, dependable long-term growth stories, and with management teams that continually pull the right levers to keep growth humming. That’s exactly what PRA Health Services offers investors.
The company is the fifth largest clinical research organization in the world, with more than 11,000 employees in more than 80 countries. The firm is able to help its clients with most facets of clinical research, including everything from Phase I trials (such as compound and safety testing) to Phase IV (post-marketing research).
It also provides its clients with data, reporting, regulations, medical writing and publishing, as well as clinical diagnostics.
The company got its start years ago offering services mostly to smaller biotech firms, and they still make up about one-third of revenue. But as PRA has expanded its services over the years, it’s attracted more and more big fish; Big Pharma now accounts for about half of the firm’s revenue. All told, PRA’s top five customers make up about 45% of its revenues (the largest is about 11%), which isn’t out of line with the industry. And PRA continues to attract more large clients thanks to a couple of advantages.
The first is speed. Because of the proximity of many of its labs to its clinical research centers, PRA estimates that it can deliver between six and 12 months of time savings on Phase I-IIa testing. A second advantage stems from the company’s data and analytics solutions, which integrate many of the firm’s capabilities into a single system, making it easier to plan, design and track a comprehensive study.
These advantages definitely led to one major catch in recent months. Takeda Pharmaceutical, the Japanese drug giant, has signed on with PRA to perform the vast majority of its full-service clinical work to bring its huge pipeline to market. Given that Takeda spends more than $3 billion per year in R&D, the potential for PRA is huge over time.
Even before the Takeda announcement, PRA had been cranking out solid and dependable growth for a while; sales have risen between 10% and 16% in each of the past five quarters, while earnings have expanded between 20% and 34% over the same timeframe. And it looks like growth could accelerate going ahead; PRA brought in $587 million of new orders in the fourth quarter, which was 42% larger than the work it performed that quarter. That boosted the firm’s backlog to $2.9 billion (up 21% from a year ago), and management has already projected a year of mid-teens revenue growth this year. Analysts see earnings up 25% for 2017 and another 18% gain next year.
PRAH came public in November 2014 and motored from 18 at its IPO to 50 by late-2015. But that began a long stretch of little progress for the stock—there were some ups and some downs, but in November of last year, it was still sitting at 51. After that, shares hit a series of higher lows, and two weeks ago, PRAH surged to new price and relative performance (RP) peaks on excellent volume.
PRAH is not likely to ever be a truly hot stock, but the company’s solid, dependable story, its prospects of accelerating growth and the stock’s breakout all bode well. I think the stock looks like a good buy around here as it consolidates in a tight range following the recent surge. BUY.
Timothy Lutts, Cabot Stock of the Week, www.cabotwealth.com, 978-745-5532, April 11, 2017