Upside Potential From Possible Transaction At PAREXEL International

| About: PAREXEL International (PRXL)

Summary

Probable transaction presents a unique opportunity for profit.

Solid Fundamentals lower the risk of investments.

An undervalued asset in a growing Industry.

On May 8, 2017 The Wall Street Journal reported PAREXEL International Corporation (NASDAQ:PRXL) hired bankers to explore a possible sale. The following is an update to my previous valuation of the company and an analysis of how the transaction may offer an opportunity for investors to profit from the possible transaction being contemplated by PRXL management.

For those not familiar with the company and/or the market sector which the company operates in: "PAREXEL International Corporation", "is a leading bio-pharmaceutical outsourcing services company, providing a broad range of expertise in clinical research, clinical logistics, medical communications, consulting, commercialization and advanced technology products and services to the worldwide pharmaceutical, biotechnology, and medical device industries." "Primary objective of the company is to provide solutions for managing the bio-pharmaceutical product lifecycle with the goal of reducing the time, risk, and cost associated with the development and commercialization of new therapies." Source: PRXL 10-K

According to industry experts, such as ISR Reports, company filings and internal research, the CRO market is expected to grow at 6%-8% CAGR.

PRXL reported Third Quarter Fiscal year 2017 Results on 4/29/17 beating analyst expectations on earnings. Adjusted for non-recurring, the earnings per share was 74 cents while the street had expected an adjusted earnings of 73 cents per share. The revenue of $529.3 Million for the third quarter increased 0.4% over the same quarter prior year. Earlier in the year (January 2017) management announced a restructuring program which the company expected to result in a net gain of $75-85 million for Fiscal Year 2018, driving toward a 14-16% adjusted operating margin.

Before the publication of WSJ article the company was trading in the $64-$67 range, closing at $68.86 on May 5th , 2017. By the time market closed on May 8th, PRXL was trading at $73.97, while S&P remained virtually unchanged. As of this writing PRXL is trading in the high $70s range.

The following analysis investigates the upside value the investor may be able to capture should the reported transaction consummate which, based on circumstances, is highly possible. It is also highly likely for the transaction to be completed in 2017.

Valuation:

At current $79.52 range, PRXL is trading at a trailing PE ratio of 34.76, a good indication of how the market is valuing the company. As compared to its peer group (Public CRO companies) PRXL is trading below the median P/E for the group.

Source: Pars Capital Partners, LLC

Next I consider the EV/EBITDA valuation. Comparing the EV/EBITDA ratio of peer companies to the subject company, gives us a good indication of how not-only the stock is priced according to the market, but also how the company is valued beyond the common stock. As a rule, if all other factors are equal, a lower EV/EBITDA as compared to peer group usually is a signal of undervaluation of the enterprise as compared to peer group which seems to be the case for PRXL.

Source: Pars Capital Partners, LLC

Just as EV/EBITDA is a better tool to compare companies that have different interest and depreciation expenses, using Net Sales in EV/Sales we can eliminate the effects of different methods of calculating operating expenses.

Source: Pars Capital Partners, LLC

PRXL has the lowest EV/Sales ratio, which shows how undervalued it is compared to peers.

The last ratio I considered for PRXL was the Price/Earnings to Growth (PEG) ratio. Though this ratio is implicit rather than explicit, and the growth rate is an expectation and by no means guaranteed, it is never the less a good barometer for valuing a stock.

Source: Pars Capital Partners, LLC

PRXL's historical PEG is in negative territory, a contributing factor to the undervaluation of company, though future growth expectations are much more positive.

Source: Zacks Investment Research

OTHER FACTORS:

An investor interested in taking/increasing a position on PRXL should also consider the following. Starboard Value, LP a New York based investment advisor focused on deeply undervalued U.S. based companies has aggregated a 5.7% position on PRXL. According to 13-D filed by the company, Starboard believes the shares of PRXL were "substantially undervalued" and that "there is a substantial opportunity to improve the Issuer's operating margins", activist code word for -time to look for buyer- and according to recent reporting Starboard has launched an activist campaign to locate a suitable buyer for PRXL.

This of course is welcomed news for the opportunistic buyer of company's public stock. At the end of the day, PRXL could climb to the mid $80s range, and given the premiums prevalent in the CRO subsector for acquisitions, the transaction could close in low $90s, offering an 12%-14% return in absolute terms.

PRXL has completed the following acquisitions within the past 24 months: The Medical Affairs Company, LLC, ExecuPharm, Inc and Health Advance, LLC adding an aggregate of $136.9 Million in GoodWill to its balance sheet directly contributed to the aforementioned acquisitions.

The company has also executed on two recent stock repurchase programs. Fiscal Year 2016 Share Repurchase and Fiscal Year 2017 Share Repurchase agreement. At the time of writing this analysis, PRXL had completed $400 million in aggregate on the two stock repurchase agreement.

What could go wrong:

The risk to the trade is that the transaction would not materialize. Given current price of PRXL at $79.52, should the transaction not materialize, the investor would be left with a trade that has been purchased on the upper end of value chain and should expect a return in line with segment expectation of 6-7%.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any 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.

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