Can Medpace Stock Keep up this Pace?

Since Medpace (NASDAQ:MEDP) stock made its August 2016 market debut around $28, it has enjoyed a very nice run. Over the last three calendar years, Medpace has had returns of 46%, 59%, and 66%, respectively. It is already up 21% in 2021.

The health care company rode a seven-day winning streak into its unusually timed President's Day fourth-quarter earnings report amid investor optimism around strong earnings growth. Will the company's 2021 inauguration be greeted favorably by the market?

Let's take a look at how Medpace fared in its most recent quarter—and whether this stock could eclipse its stellar 2020 performance with a 70%-plus return this year.

What Does Medpace Do?

Medpace provides clinical development services to biotech, pharmaceutical, and medical device companies all over the world. As a contract research organization (CRO), Medpace plays a key role in moving along novel drug candidates from start to finish, i.e., from early phase clinical research to late-stage clinical trials.

Medpace's regulatory and product development expertise encompasses 13 therapeutic specialties including autoimmune diseases, cardiovascular, oncology, and pediatrics. Oncology is its biggest therapeutic area. The medical device business performs a range of diagnostics and other services.

With many of today's drugs and medical devices being developed through international collaborations, Medpace's global footprint gives it a leg up on its more domestically focused peers. Its staff of medical, operational, and regulatory specialists spans six continents. This helps the company form a strong relationship with local regulators and gain better access to patient populations in each country.

Its headquarters in Cincinnati has a fully integrated Clinical Research Campus, the only CRO in the world that can make that claim. This makes it more efficient than the competition and is a big reason why clients choose to work with Medpace.

How Did Medpace Perform in 2020?

For the fourth quarter, Medpace reported 13% revenue growth and a 73% surge in earnings per share (EPS). Revenue was up 7.5% for all of 2020 and EPS rose 44% as the company's EBITDA margin expanded from 17.4% to 20.3%. Medpace built off its phenomenal third quarter profit margin gain (from 17.1% to 22.5%) by notching an even higher 23.2% margin in Q4.

It may be assumed that Medpace's strong results were driven by COVID-19 demand, but this was far from the case. Only 2% of revenue was tied to COVID-19—and its $1.5 billion backlog consists of only 3% of COVID related orders.

Medpace exited the year with a surge in free cash flow ($97.7 million) and a net cash position of $277.8 million. The company is known to have one of the strongest balance sheets in its industry. This supported its ability to buy back $47.4 million worth of its stock last year.

Management's outlook for 2021 is understandably optimistic. It sees top line growth of 21.5% at the midpoint which would mark a considerable acceleration from last year. GAAP EPS growth is forecast to be nearly 12% at the midpoint.

 Is it a Good Time to Buy Medpace Stock?

Medpace shares were a bit overheated heading into the shortened trading week based on a relative strength indicator (RSI) north of 80, an inflated MACD reading, and the stock price's distance from its 50-day moving average.

The 40x forward P/E multiple suggests the same. Although a premium valuation is warranted given Medpace's industry leading revenue and earnings growth and strong balance sheet, its P/E multiple has swelled to around 50% above the industry average.

Some sell-side firms have also expressed concern about Medpace's exposure to small, upstart biotechnology companies as these unproven customers can be higher risk and less lucrative. Three-fourths of the company's customers are small biopharmaceutical firms.

On the other hand, more bullish analysts view Medpace as the beneficiary of a favorable government and private funding environment for biotechnology companies in the wake of COVID-19.

Regardless of whether the bulls or bears are right, Medpace shares are trading well above the Street's highest price target of $135. Either analysts have some catching up to do or a correction is imminent.

Meanwhile, Medpace insiders seem to think the stock has room to run. Over the last three months corporate insiders have purchased more than $7 million worth of the stock suggesting they see continued strength ahead.

To get to a 70% return this year Medpace stock price would have to climb above $236. This may be a stretch, but another 40%-plus return seems likely. Just six weeks in the new year, the stock is already halfway there and has a ton of momentum entering fiscal 2021.

So, new investors are probably better off waiting for a better entry point on Medpace. But if and when share price weakness finally arrives, there's no need to think twice about climbing aboard this growth bandwagon. A market leadership position and expanding margins should be a formula for continued success in 2021.