Medpace (MEDP), a solid and growing company

What do they do

Medpace provides support for the drug and medical device industry. They help companies develop products from phase I all the way to phase IV in the approval process. Basically, they help companies navigate the approval process to bring new products to market.

Management

The CEO, August Troendle, is also the founder of the company. He garnered a lot of attention last year when he bought several million dollars worth of stock when the market was down. He and other insiders own 23% of the stock. In my opinion management is very much aligned with the success of the business.

Balance sheet and financials

Medpace has a pristine balance sheet. They have a total debt of $257 million, most of which is tied to physical property they own. That is less than the FCF for one year, and the company could easily pay it off if they so desired.

Last year the company produced $384 million in free cash flow, or about 5.6% of its current market cap.

The market cap is $6.8 billion, making it a solid mid-cap company. Return on equity is 54% and ROIC is 35%. Importantly, the ROIC has risen every year as a public company.

Growth

Medpace has been a fast growing company. They’ve grown revenue by an average of 27% for the last 5 years, and EPS has grown 40% over the same timeframe. While their growth is likely to slow in future years, they are still forecast to grow revenue by 15-20% going forward, and EPS likely even more due to their share count decreasing.

Medpace has also been great at growing free cash flow. FCF has grown more than 20% every year except the pandemic affected 2021. In recent years they have used FCF partly to buy back company stock. They only started buying back stock when the stock price fell in 2022, showing good capital discipline. However, since then they have reduced shares outstanding by 10%. It is unlikely that they could keep up that rate at the current stock price and free cash generation, but 2-3% annually is certainly possible.

Medpace has a large backlog of business, which bodes well for the future. They currently have a backlog of $2.3 billion, which grew by 17% last year.

Medpace is an interesting play on pharma. They get paid for facilitating trials, not based on them getting approved. So the more drug development that is being attempted, the more the company benefits. However, they don't have the downside risks of owning the actual pharma companies that may or may not be successful. This is a way to bet on the growth of pharma/biotech with lower amounts of risk and no ETF fees.

Risks

Medpace is susceptible to pullbacks in clinical trials. The low interest rate environment has seen a lot of biotech growth, as cheap funding was available. As this dries up, medpace might have fewer clients.

Government changes to healthcare policy could adversely affect their business. Medpace also sights corporate consolidation in the medical sector as a possible risk.

The company has also mentioned recruitment as a possible hindrance to their growth. They need to add employees to grow, but the current tight labor market has made that harder. Medpace has been increasing wages recently to help. The company has also received numerous “best place to work” awards, so they are addressing this problem to the best of their ability.

Valuation

Doing a DCF valuation, I used 10% as a discount rate. I estimated FCF growth of 10% annually for 10 years, and 4% as a terminal growth rate.

10% is less than the historical growth rate and does not account for share repurchases. I could easily see them outperforming this, but I want to be conservative.

With these figures, I arrived at a fair value of $208.75.

Morningstar has a fair value of $227, being close to my more conservative estimate. As of writing the stock is trading around $220. Buying now would be a chance to buy a great company at a fair price, in my opinion.

Most importantly, in my opinion, is that Medpace has a long runway of growth allowing a chance for compounding. Biotech is a new and growing industry, and medical tech in general is forecast to be a growth industry for years.

On a personal note, I currently have no position in this name, though I am looking to start one. I owned this name several years ago, but sold it in early 2022 as I saw the market turning against growth stocks. I view this as one of my biggest mistakes as this is an amazing company.