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When investing in a high inflation environment, it’s of crucial importance to consider the impact of higher prices on a company’s business. The healthcare industry may offer some opportunities since the demand for its products and services is less elastic than in other sectors, and some companies can count on a strong moat which helps them to absorb the impact of higher inflation. IQVIA is among those companies; and its strong growth record, its leading position in the industry, as well as excellent business opportunities in the coming years are very encouraging. I consider the stock to be undervalued by most likely 28.88% with a price target at $282.76.
IQVIA Holdings Inc. (NYSE:IQV) is a leading global contract research organization which was formed in 2016, from the merger between IMS Health Holdings, Inc. and Quintiles Transnational Holdings Inc. The company employs over 79,000 employees and provides advanced analytics, technology solutions, and clinical research services to the life sciences industry in more than 100 countries.
Its most significant segment Research and Development Solutions, grew 13.84% Compound Annual Growth Rate (CAGR) over the past 7 years, offering solutions in clinical project management, clinical trials and monitoring, and central laboratory services. During the same period, the highest growth was achieved in the Technology and Analytics Solutions segment, with a 57.52% CAGR; Artificial Intelligence (AI) automation, and Machine Learning (ML) have become central points for the company since many pharmaceutical and biotechnology companies as well as healthcare data companies and agencies rely on it to make decisions.
The most important geographical areas in terms of revenue in 2021 were the United States with 34%, Europe and Africa with 31.14%, followed by the Asia-Pacific region with 19.23%, and the rest of the Americas with 15.35%.
The company reported a consistently strong gross margin, averaging 34.45% in the past 11 years and reaching 33.50% at the end of 2021. Its operating margin growth reached 17.56% CAGR over the past 5 years, standing at 10.42% on December 31, 2021. Among some of its peers, the average gross margin was 40.18% and the operating margin was averaging at 11.95% in 2021, with the biggest player in the industry, Laboratory Corporation of America Holdings (NYSE:LH) recording the highest operational profitability at 21.64%, followed by PPD Inc. with 11.37%, which was recently acquired by Thermo Fisher Scientific Inc. (NYSE:TMO), ICON (NASDAQ:ICLR) with 9.74%, which acquired PRA Health Sciences in July 2021 by further consolidating the industry, and finally Syneos Health, Inc. (NASDAQ:SYNH) with 7.90%.
IQVIA significantly improved its investment profitability, averaging a 4.18% Return on Invested Capital (ROIC) over the past 5 years, and reporting 7.13% at the end of 2021. Although some of its peers are less efficient in their capital allocation, with Syneos Health reporting 4.81% ROIC in 2021, and ICON only 3.25%, Laboratory Corporation of America Holdings recorded a much higher profitability, at 17.52% ROIC. The company’s leverage ratio stood at 4.77 in 2021, which is relatively high when compared to the average recorded by its peers at 3.83. QIVIA’s cash from operations significantly increased during 2021, up 50% Year-over-Year (YoY) to $2.94B, resulting in $12.03 cash flow per share, higher than the average of its peers at $10.23, and growing at 20.83% CAGR over the past 5 years. The company also reported higher EPS at 60.14% CAGR over the same period, accelerating significantly the EPS growth over the last year from $0.61 in Q4 2020 to $1.63 in Q4 2021, an increase of 167% on a YoY comparison, reaching $1.68 in Q1 2022, or 54% higher YoY.
In a high inflationary environment, it’s of primary importance for businesses to be able to protect their margins. This can most likely be achieved if the company has strong pricing power, and can therefore increase its revenue by raising its prices, by switching the sourcing strategy and reducing its input costs, or by quickly adjusting its strategy and prioritizing higher-margin products.
Inflation can arise from demand-pull, cost-push, or through build-in inflation. In the first case, strong demand for goods or services leads to an increase in prices, this is especially true for demand shocks, e.g. after a prolonged period of flat demand, or for strictly limited products and services where the demand exceeds the supply. A cost-push instead happens when the price of a good or a service increases because of higher input prices, which can be caused because of increased raw material prices, bottlenecks in the supply chain, increased labor costs, or shortages of basic materials. The third situation is instead based on the expectations of rising prices for a good or a service, where the prices are increasing in the present, and are expected to further increase in the future. Those effects on prices can be magnified by expansionary monetary policy where the central bank of a country reduces the interest rates and increase the money available in the economy, basically making money cheaper, by expansionary fiscal policy where the government intervenes in the economy by reducing the fiscal pressure and therefore increases the discretionary income for individual or businesses, or by increasing the government spending and driving up the demand in certain industries.
One of the inflation-hedged industries is Healthcare. Over the last 12 months, inflation in the US went from 4.2% in April 2021 to 8.5% in March 2022, and the Health Care Select Sector SPDR (NYSEARCA:XLV) greatly outperformed the SPDR S&P 500 Trust ETF (NYSEARCA:SPY), by returning 9.12%, while investing in the S&P 500 Index would have returned only 2.45%.
Author, using SeekingAlpha.com
As the demand for healthcare-related products and services is mostly non-discretionary, the sector performs well even during times of high inflation. This is especially true for B2B-oriented companies with strong pricing power, repeated orders, or related to high switching costs with customers involved in long-term contracts and projects as is the case for IQVIA. I think IQVIA offers significant potential with its future-oriented business, a robust moat and solid financials. The company has room to further improve its growing ROIC, optimize its operations, while increasing its market share in its most important markets. The recent announcement that IQVIA was selected to support EMA’s Data Analysis and Real World Interrogation Network (DARWIN) with its proprietary technologies and expertise by intensifying their relationship with many healthcare providers across Europe, its leadership in decentralized clinical trials, the emergence of virtual trials or the use of blockchain technologies, as well as AI and ML applications are just few of the growth drivers for IQVIA. As CEO, Ari Bousbib, declared in the latest earnings call, the company’s efficiency has increased significantly since the merger, by increasing the technology content, improving its processes and decentralized clinical trials capabilities, resulting in an overall significantly enhanced workload capacity.
To determine the actual fair value for IQVIA’s share price, I rely on the following Discounted Cash Flow (DCF) model, which extends over a forecast period of 5 years with 3 different sets of assumptions ranging from a more conservative to a more optimistic scenario, based on the metrics determining the Weighted Average Cost of Capital (WACC) and the terminal value. IQVIA has consistent profitability and solid Free Cash Flow (FCF), which is forecasted to increase at 17.72% CAGR over the coming 5 years, although I still consider a quite cautious forecast in my valuation model, especially in terms of a more prudent perpetual growth rate, considering its significant impact on the DCF valuation.
Author, using data from S&P Capital IQ
The valuation takes into account higher interest rates, which will undeniably be a reality in many economies worldwide in the coming years and lead to a higher weighted average cost of capital.
The most likely scenario in my model, the mid-valuation scenario, prices the share at $277.75 or 26.60% higher. The low-valuation scenario, which I consider to be less likely, sees the share 3.32% lower than the actual price level, at $212.11. The most optimistic scenario, also described as the least likely in my model, prices the stock at $398.67 with 81.71% upside potential. I then compute my opinion in terms of likelihood for the different scenarios, which gives a weighted average price target with 28.88% upside potential at $282.76.
IQVIA’s major risks relate to third-party data providers, which may restrict or refuse to license data or provide services, data privacy or protection policies which restrict the access or the usage of personal information could seriously impair its business. Foreign exchange headwinds as well as higher cost of capital could affect the profitability. While the actual conflict in Ukraine has a little less than 1% impact on the revenue and approximately 3% of the company’s global patient recruitment comes from Ukraine and Russia, an extension of the conflict to other countries could have more severe consequences for its business. Last but not least, further pandemic-related restrictions or extended disruptions in the relevant industries could delay some contracts or reduce IQVIA’s capacities.
The stock reached its All-Time High (ATH) at $285.61 on December 30, 2021, and soon after began a downtrend until the recent low at $204.05 on April 27, 2022. From a technical analysis point of view, the stock is not in a good position and would have to form a proper base before a new uptrend could begin. The stock is showing some relative weakness since its ATH when compared to the XLV and is quite similar performing as the NASDAQ Composite Index.
Author, using TradingView
The most relevant support levels in the short term can be found at $207.75 and $204.50, while the closest resistance levels are now situated around $223.70, and $235.55. The stock is trading under its EMA50 and the EMA10 which is a clear sign of the sell-side having control over the stock in the past few weeks. IQVIA can count on significant institutional support among its shareholders with 90% of the outstanding shares owned by institutions, and a relatively low short interest of 1.15%. Long-term investors could take advantage of this potentially interesting price level to set up their long-term position in a high-inflation environment. Momentum, swing, and position traders could observe if the recent levels will be kept and a possible base will be formed before entering a position, since many indicators are still not showing a reversal, and the stock may be dragged down in the short term by the general market’s negative tendency.
In a high inflation environment, investors want to look for companies which are less impacted by price increases, have more pricing power, and more capabilities of mitigating this risk in their business. IQVIA has a diversified business, a solid moat, and significant potential to maintain and even increase its profitability. It’s a solid investment opportunity for long-term-oriented investors who search for a safer harbor during times of higher inflation, and the recent correction may offer an interesting entry point since the stock is fundamentally undervalued by 28%.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: All of my articles are a matter of opinion and must be treated as such. All opinions and estimates are reflecting my best judgment on selected aspects of potential investment in securities of the companies mentioned, as of the date of publication. Any opinions or estimates are subject to change without notice. I am not acting in an investment adviser capacity and I invite every investor to do its due diligence before making any investment decisions. I take no responsibility for your investment decisions but wish you great success.