Positioning For Medpace Into FY22 Earnings (NASDAQ:MEDP)

Investment Summary

Since our last publication on Medpcace Holdings, Inc. (NASDAQ:MEDP) it’s been pleasing to see the stock see out the FY22′ period on a high. In a show of fortitude, shares have climbed another 205bps from the time of that publication in November to the time of writing. MEDP is set to report its FY22′ earnings in mid-February, and we thought it was prudent to examine how the market is positioning in the stock heading into this date.

Note, our most recent buy thesis on MEDP is built on several bullish pointers, including the following:

1. Those holding the stock throughout the FY22 period enjoyed a 20.7% TTM return on equity, with TTM EPS of $4.81 [up until the end of Q3 FY22′].
2. Profitability a standout with ~33% trailing return on invested capital (“ROIC”) on the back of 31% YoY growth in net operating profit after tax (“NOPAT”) and 53% YoY growth in FCF, otherwise $1.96 in NOPAT/share and $8.50 in TTM FCF/share.
3. Capital budgeting cycle also noteworthy with a c.$109mm clip in CFFO during Q3 FY22′, concurrently credit facility liability by $110mm, reducing gross debt to $139.7mm. This is down from $952mm in December 2021.
4. Valuations equally supportive with a price objective of $269 or ~38.6x forward earnings, resulting in valuation upside of ~23%.
5. Cash conversion cycle relatively flat from Q3 FY19’–Q3 FY22′, up just 4 days to 48 days.
6. Despite cash & equivalents compressing to record lows, this is more than covered by the strong ROIC that implies the company is able to continue funding its future growth initiatives, offsetting the cash burn substantially.
7. Following the earnings print, the stock has continued to diverge away from the S&P 500, offering a source of tactical alpha for active equity investors [Exhibit 1].

We encourage you to read our last two publications on MEDP by clicking here and also here.

Net-net, we continue to rate MEDP a buy coming into its FY22 numbers, and here I’ll run through the market’s positioning into the same period for the benefit of investor positioning. Rate buy, $269 price target retained.

Exhibit 1. MEDP divergence from the S&P 500 since Q3 FY22′ earnings, serving good platform heading into FY22′ numbers.

MEDP market overview

Heading into MEDP’s upcoming earnings print, we thought it was prudent to examine what the market has been saying on the stock up to this point. You’ll see below that MEDP jumped after its Q3 FY22′ numbers and resulted in the stock setting new 52-week highs. Since then, it has consolidated in a sideways channel, breaking below both 50DMA and 250DMA’s. At the same time, the weekly trend in trading volume has been eroding over the past 9 weeks.

At this point, it has dried up, and this requires a deeper analysis to gauge if there’s enough buying power to see the stock rally prior to earnings, or if we have to wait until the numbers are presented. The declining volume trend with sideways price action could be evidence of resistance in our opinion.

Exhibit 2. Weekly price evolution of MEDP share price hasn’t moved higher since the last leg upward.

To check this, we examined the daily money flows into and out of MEDP’s equity, as seen in Exhibit 3. Note, the bolus of inflows for the stock were seen prior to the upside move in October, and has since been followed by an outflow bias. In fact, the large jump at that time wasn’t supported by an enormous inflow of capital into buying the stock.

This is important information to know, as it shows what investors are doing with respect to buying and selling activity in MEDP heading into the February earnings number. Noteworthy is the latest spike in share price that’s occurred in the first week of the new year, again preceded by a spike in daily money inflows. This could suggest investor bullishness heading into the company’s FY22′ earnings.

Exhibit 3. Daily money inflows and outflows into MEDP equity, demonstrating pullback in order volume in the back end of FY22, picking up in the new year.

To gauge the latest uptick in closer detail, we looked at the positive and negative volume indices (“PVI” and “NVI” respectively). The NVI is what we’re most interested in here, and you’ll note it has ticked up alongside the MEDP share price, suggesting that larger buyers [institutional, large accounts] have been present in the up-move. At the same time, there’s a decent amount of retail flows, evidenced by the lift in the PVI.

This tells us that there’s been broad-based buying from a number of market participants, helping to drive the rate of change in the MEDP share price since January.

Exhibit 4. Coupling of large and retail money flows appears to be driving rate of change in MEDP share price since January.

On this note, from a more technical picture, we studied at the below cloud chart for more information. You’ll see that MEDP has been testing the ceiling of the cloud over the past few weeks before breaking to the upside, with the lagging line also in bullish territory. We are bullish when the price line and lagging line are above the cloud. At the same time, on balance, volume has maintained an upward bias in continuation of its longer-term uptrend. This supports the information obtained on the level of buying support in MEDP shares.

Exhibit 5. Shares trading above cloud support with on-balance volume in tandem.

Valuation and conclusion

We retain our previous price target of $269, that calls for FY22′ EPS estimate of $6.97 per share [see previous analysis, Exhibit 8: “MEDP Fair Value”]. You can see the full scope of analyst non-GAAP estimates into FY24′ in Exhibit 6. This also represents a fair forward P/E of ~38.6x, ahead of consensus forward P/E estimates of 32.4x. This may appear pricey, especially at a ~20.2% premium to the sector, however we believe there’s scope for the stock to push to this level.

Exhibit 6. Consensus analyst non-GAAP EPS estimates for MEDP FY22–24′.

This doesn’t bode well when looking at Seeking Alpha’s quantitative factor grading system on the stock, where MEDP is rated an F in valuation [Exhibit 7]. At the same time, however, it is rated within the top bands for growth, profitability, momentum and revisions, providing a solid platform for it to re-rate to the upside. By best estimation, there is enough evidence from all the available data to remain bullish on MEDP leading into its FY22 numbers.

Exhibit 7. MEDP rated lowly on valuation with factor grading, yet, grades in top bands across all other measures.

Net-net, we believe there is ample evidence to remain bullish on MEDP leading into its FY22′ earnings. The key downside risk is if the company misses its numbers at the time of reporting, which could see investors sell the stock. This must be factored into the investment debate heavily, and as mentioned, is the key downside risk here by estimation. Despite this, market positioning is bullish leading into the earnings print, and this is corroborated by the several studies examined in this report. We retain the $269 price target derived in our last analysis, calling for $6.97 in EPS for the year. Retain buy.