Diagnostics & Research company Medpace is standing out today, surging to $210.4 and marking a 32.6% change. In comparison the S&P 500 moved only 0.9%. MEDP is 44.77% above its average analyst target price of $145.33, which implies future downside for the stock. Indeed, the average analayst rating for the stock is hold, showing a rather gloomy outlook. Over the last year, Medpace has underperfomed the S&P 500 by 8.5%, moving -25.5%.
Medpace Holdings, Inc. provides clinical research-based drug and medical device development services in North America, Europe, and Asia. The company is part of the healthcare sector. Healthcare companies work in incredibly complex markets, and their valuations can change in an instant based on a denied drug approval, a research and development breakthrough at a competitor, or a new government regulation. In the longer term, healthcare companies are affected by factors as varied as demographics and epidemiology. Investors who want to understand the healthcare market should be prepared for deep dives into a wide range of topics.
Medpace's trailing 12 month P/E ratio is 36.2, based on its trailing Eps of $5.82. The company has a forward P/E ratio of 32.8 according to its forward Eps of $6.42 -- which is an estimate of what its earnings will look like in the next quarter.
As of the third quarter of 2022, the average Price to Earnings (P/E) ratio for US healthcare companies is 13.21, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (Eps), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
We can take the price to earnings analysis one step further by dividing the P/E ratio by the company’s projected five-year growth rate, which gives us its Price to Earnings Growth, or PEG ratio. This ratio is important because it allows us to identify companies that have a low price to earnings ratio because of low growth expectations, or conversely, companies with high P/E ratios because growth is expected to take off.
Medpace's PEG ratio of 1.82 indicates that its P/E ratio is fair compared to its projected earnings growth. In other words, the company’s valuation accurately reflects its estimated growth potential. The caveat, however, is that these growth estimates could turn out to be inaccurate.
To gauge the health of Medpace's underlying business, let's look at gross profit margins, which are the company's revenue minus the cost of goods only. Analyzing gross profit margins gives us a good picture of the company's pure profit potential and pricing power in its market, unclouded by other factors. As such, it can provide insights into the company's competitive advantages -- or lack thereof.
MEDP's average gross profit margins over the last four years are 62.5%, which indicate it has a potential competitive advantage in its market. These margins are declining based on their four year average gross profit growth rate of -1.5%.
Another key to assessing a company's health is to look at its free cash flow, which is calculated on the basis of its total cash flow from operating activities minus its capital expenditures. Capital expenditures are the costs of maintaining fixed assets such as land, buildings, and equipment. From Medpace's last four annual reports, we are able to obtain the following rundown of its free cash flow:
- 2021 free cash flow: $235,056,000.00
- 2020 free cash flow: $227,336,000.00
- 2019 free cash flow: $183,955,000.00
- 2018 free cash flow: $140,560,000.00
- Average free cash flow: $196,726,750.00 %
- Average free cash flown growth rate: 19.3 %
- Coefficient of variability (the lower the better): 22.2 %
Free cash flow represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With a positive cash flow as of the last fiscal year, MEDP is in a position to do either -- which can encourage more investors to place their capital in the company.
Value investors often analyze stocks through the lens of its Price to Book (P/B) Ratio (market value divided by book value). The book value refers to the present value of the company if the company were to sell off all of its assets and pay all of its debts today - a number whose value may differ significantly depending on the accounting method.
Medpace's P/B ratio indicates that the market value of the company exceeds its book value by a factor of 22, so the company's assets may be overvalued compared to the average P/B ratio of the Healthcare sector, which stands at 4.07 as of the third quarter of 2022.
Medpace is by most measures fairly valued because it has an inflated P/E ratio, an elevated P/B ratio, and a steady stream of strong cash flows with an upwards trend. The stock has mixed growth indicators because it has a an average PEG ratio and consistently strong gross margins that are stable. We hope you enjoyed this overview of MEDP's fundamentals. Make sure to subscribe to our free newsletter for daily equity reports.