IQVIA Stock – A Smart Choice in a High Inflation Environment (NYSE IQV).

Thesis on investment

It’s crucial to consider the effects of higher prices on a company when investing in a high-inflation environment. There are opportunities in the healthcare industry, as there is a high demand for its products.Services is less flexible than other sectors. However, some companies have a strong moat that helps them absorb the effects of higher inflation. IQVIA belongs to that group. Its strong growth record and leading position within the industry as well as the excellent business opportunities it holds for the future are very encouraging. The stock is undervalued by 28.88%, with a price target of $282.76.

A quick look at IQVIA

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 has over 79,000 employees. It provides advanced analytics, technology solutions and clinical research services to more than 100 countries in the life sciences industry.

Research and Development Solutions, the most important segment, grew 13.84% in Compound Annual Growth Rate (CAGR), over the past seven years. It offers solutions for clinical project management, monitoring and central laboratory services, as well as clinical trials and monitoring. The Technology and Analytics Solutions segment experienced the highest growth, at 57.52%. Artificial Intelligence and Machine Learning have been key points for the company as many pharmaceutical and medical technology companies, as well healthcare data companies and agencies, rely on them to make their decisions.

The United States was the most important geographic area in terms of revenue in 2021. Europe and Africa had 34% and Africa had 31.14%. Asia-Pacific followed with 19.23% and 15.35%.

The company reportedThe gross margin is strong, at an average 34.45% for the past 11 year and reaching 33.50% at 2021. Its operating profit growth was 17.56% over the past five years, and was 10.42% as of December 31, 2021. Its average gross margin was 40.18%. The operating margin was at an average of 11.95% in 2021. Laboratory Corporation of America Holdings (NYSE.LH) was the largest player in this industry, recording 21.64% operational profit. PPD Inc was second. With11.37%, which was acquired recently by Thermo Fisher Scientific Inc. NYSE.TMO), ICON NASDAQ:ICLR with 9.74%, who acquired PRA Health Sciences en July 2021 to consolidate the industry and finally Syneos Health Inc. NASDAQ.SYNH with 7.90%.

IQVIA’s investment profitability has been significantly improved, reporting a 4.18% average Return on Invested Capital over the past five years and 7.13% at the close of 2021. Although its peers are less efficient with capital allocation, Syneos Health reported a 4.81% ROIC and ICON only 3.25 percent, Laboratory Corporation of America Holdings had a much higher profitability rate at 17.52% ROIC. The company’s 2021 leverage ratio was 4.77, which is quite high compared to its peers’ average of 3.83. QIVIA’s cash flow from operations increased significantly during 2021. It grew 50% Year-over–Year (YoY), to $2.94B. This resulted in $12.03 cashflow per share, which is higher than the $10.23 average of its peers and has grown at 20.83% CAGR over 5 years. The company also reported a higher EPS of 60.14% CAGR during the same period. This significantly increased the EPS growth from $0.61 in Quarter 4 2020 to $1.63 quarter four 2021. This is an increase of 167% YoY. QIVIA’s Q1 2022 earnings per share was $1.68, which is 54% more YoY.

IQVIA in a high inflation setting

Businesses need to be able protect their margins in a high inflationary climate. This is possible if the company has strong pricing power and can increase its revenue by changing its sourcing strategy and reducing input costs or quickly adapting its strategy to prioritize higher-margin items.

Inflation can be caused by cost-push or demand-pull. In the first, strong demand for goods/services leads to an increase of prices. This is especially true for demand surprises, e.g. After a prolonged period with flat demand or for products and services that have a limited supply, prices can rise. Cost-push occurs when the price for a good or service rises due to higher input costs. This could be caused by increased raw material costs, bottlenecks or labor costs or shortages. The third situation is based on the expectation of rising prices for a good/service, where prices are increasing in present and will continue to increase in future. Expansive monetary policy is where the central banking of a country lowers interest rates and makes more money available. It can also magnify the effects on prices by making money less expensive.

Healthcare is one of those industries that has been hit by inflation. Over the past 12 months, InflationThe US went from 4.2% to 8.5% between April 2021 and March 2022. The Health Care Select Sector SPDR(NYSEARCA.XLV), which returned 9.12%, outperformed SPDR S&P 500 Trust (NYSEARCA.SPY) only 2.45%.

The sector’s performance is strong even in times of high inflation because the demand for healthcare-related products or services is largely non-discretionary. This is especially true of B2B-oriented businesses with strong pricing power, repeat orders, or high switching costs for customers involved in long-term projects and contracts. I believe IQVIA has significant potential due to its future-oriented business and strong financials. The company still has room to improve its ROIC and optimize its operations while growing its market share in the most important markets. Recent AnnouncementIQVIA was selected by EMA to support its Data Analysis and Real World Interrogation Networks (DARWIN) with their proprietary technologies and expertise. Its leadership in decentralized clinical trials and the emergence virtual trials are just a few examples of the growth drivers for IQVIA. Ari Bousbib, CEO of IQVIA, stated in the most recent earnings call that the company’s efficiency had increased significantly since the merger. The company has improved its technology content, processes, and decentralized trials capabilities.

Valuation

To determine the fair market value of IQVIA shares, I use the following Discounted Cash Flow model (DCF). It is based on 3 sets of assumptions that range from a more conservative scenario to a more optimistic scenario. These assumptions are based upon the metrics that determine the WACC and terminal value. IQVIA’s solid profitability and solid Free Cash Flow is (FCF) forecast to grow at 17.72% CAGR over 5 years. However, I still consider my valuation model cautious due to its significant impact on DCF valuation.

The valuation considers higher interest rates, which will undoubtedly become a reality in many economies around the world in the coming years. This will lead to a higher average weighted cost of capital.

My model predicts that the share will be valued at $277.75, or 26.60% more. The share’s actual price level is $212.11, which I consider less likely. The most optimistic scenario, also called the least probable in my model, values the stock at $398.67 and has 81.71% upside. I then compute my opinion on the likelihood for each scenario, which gives me a weighted price target of $282.76 with 28.88% potential upside.

Risk discussion

IQVIA’s biggest risks are related to third-party providers of data, which could restrict or refuse to license data. They may also provide services, data privacy, or protection policies that restrict the access or use of personal information. Profitability could be affected by foreign currency headwinds, as well as higher capital costs. While the actual conflict with Ukraine has a small impact on revenue, and about 3% of its global patient recruitment comes through Russia and Ukraine, an extension to the conflict could have greater consequences for the company’s business. Last but not least: additional pandemic-related restrictions, extended disruptions in relevant industries could delay some contract or reduce IQVIA’s capabilities.

Market timing

The stock reached its All-Time High at $285.61 on Dec 30, 2021. Soon after, it began a downtrend to $204.05 on April 27, 20,22. Technical analysis shows that the stock is not in a favorable position. A solid base would be needed before a new uptrend can begin. Comparable to the XLV, the stock has shown some relative weakness and is performing very similar to the NASDAQ Composite Index.

In the short term, the most relevant support levels are $207.75 and $204.50. While the closest resistance levels to $223.70 and $255.55 are now located, the levels of support are $207.75, $204.50 and $204.50. The stock trades below its EMA50 level and the EMA10 level, which is a clear indication that the sell-side has taken control of the stock over the past few weeks. IQVIA has significant institutional support from its shareholders, with 90% of outstanding shares held by institutions and a low short interest of 1.15%. This could be a great price level for long-term investors to help them build a long-term position within a high-inflation environment. Swing, position and momentum traders could monitor if the current levels will be maintained and a base formed before entering a position. However, many indicators are not showing a reversal and the stock may be dragged lower in the short-term by the general market’s negative tendency.

The bottom line

Investors want to find companies that are less affected by price increases, have greater pricing power and are better equipped to mitigate this risk. IQVIA is a diversified company with a strong moat and significant potential to increase its profitability. Investors who are looking for a safe harbor in times when inflation is high will find this stock a solid investment option. The recent correction could be a good entry point, as the stock is currently 28% undervalued.