2013 – The Great Irish Share Valuation Project (Part V)
Prior Post: Here
Price: USD 28.43
ICON’s starting to fire on all cylinders again, as I correctly anticipated. Well, except for the share price…but I’m sure investors aren’t complaining! ;-) Last year, the company was squeezed between (virtually) zero growth in its existing contract revenues & the challenges/expenses of ramping up to meet some v large contract wins. Operating margins, even on a pre-exceptional basis, had fallen to near-zero - but valuing ICLR on that basis would clearly have been incorrect. It seemed reasonable to presume margins would return to 10%+ as new contract revenues/margins matured.
On the other hand, bidding on & winning these contracts was clearly vital, so the prudence of their contract pricing & assumptions remains unclear. [Big Pharma has huge negotiating leverage with ICON & its peers. The fact ICLR's margins max out far below 20% (perfectly achievable for this type of business), attests to the power of Pfizer, BMS, etc.] My approach was a valuation based on averaging current & historic margins, plus a significant debt adjustment to reflect its financial strength. ICLR ended up looking fairly over-valued to me, absent an actual bounce-back in margins.
Hmm… Shareholders clearly didn’t need this reassurance, they bought the shares regardless! The company recently provided $1.40-55 EPS guidance for 2013, a substantial step-up from 2012. This puts ICLR on a prospective 19.3 P/E - uh, that looks a little rich to me! However, considering the steady ramp in revenues, margins & earnings this year, I’m happy to gross up from their latest results. Quarterly revenues are running at $285.5 mio, for an operating margin of 7.3% & an EPS of $0.29. My valuation’s based on a similar Price/Sales methodology as last year, but now incorporates a 20 P/E (using a $1.16 EPS run-rate). To me, ICON appears about as over-valued as it was last year.