ICON PLC: An Easy Stock To Choose For Diversified Exposure To Healthcare And Clinical Research

Aug. 26, 2021 9:26 AM ETICON Public Limited Company (ICLR)3 Comments6 Likes

Summary

  • ICON Public Limited Company is a leading clinical research organization, aiding researchers and companies across the entire industry in performing their work.
  • The healthcare industry is extremely strong at the moment and set to see favorable tailwinds over the next few years.
  • I believe ICON has been shrewd in its management and growth so far and is a low-risk investment for any investor.
Medical technology concept. Medical doctor in consultation room.
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Summary

ICON Public Limited Company (NASDAQ:ICLR) is a leading clinical research organization (CRO), or a company that aids pharma, biotech, and other research laboratories in completing their work. As one of the largest names in the sector, ICON provides services across the board, and I find they are well positioned to take advantage of the current healthcare secular upswing. The most important factors of their successful business are their capabilities across all therapeutic indications, and their wide geographic expertise, further highlighting their competitive advantage. Their capabilities reduce overall risk, as the areas with above average growth will support lagging ones.

Image 1: Source. ICON is well diversified, always an important indicator of long-term success and stability.

Although large and diversified, there is often an issue with CROs in that the large players have out-dated or legacy solutions in which smaller niche players may be more suitable for clients. However, I believe that ICON has renewed their focus on innovative techniques that would bring them in-line with niche players. Since most research organizations only change CROs when the services are not in line with their goals, providing the broadest and most comprehensive services will also continue to help ICON perform better than their peers.

Image 2: Source. Watch for ICON to continue enhancing their services, as this will be key reason for out-performance.

The company is a solid performer financially with 13% average revenue growth over the past decade, high profitability with a net income margin of 11.4%, and strong returns on total assets over the past five years at 12.82% on average. This has led investors to see 20% EPS growth over the past decade, and the stock price reflects that with almost a 1200% return over the past decade. I foresee that this pattern of success is unlikely to slow down or stop, as the company is well set to perform well into the future.

The reason why I have chosen ICON out of other CRO companies is the strong balance sheet and shrewd use of capital. In particular, the company has not been burdened by debt at all over the past 10 years, and dilution is non-existent due to the help of occasional share buybacks. With this, the company reached a record cash stockpile last quarter, and put this to good use last quarter, and I believe investors will truly benefit. This process will also be discussed below. However, I will conclude my summary with the idea that has been common in many of my recent articles, and state that I believe this company is a solid long-term choice for investors who want a simple investment that will perform well and let you sleep well at night.

In this regard, ICON is the best in the CRO industry, and will fulfill this task easily with my expectations. While not a flashy growth company seeing 20% or more growth, I think investors will be quite pleasantly surprised if they buy now and check back in five or ten years. For those who are interested, let's take a little closer look.

Image 3: Source. 2021 has seen a quick rebound over lockdown affected 2020. It will be difficult to estimate how much an impact secular trends will contribute to continued long-term growth.

The Current Healthcare Industry

In a few of my recent articles, I have highlighted the favorable environment for healthcare and I compile various data points in each article. I recommend checking them out if you haven’t. The first important factor is that many names in the industry are not seeing the same overvaluation as the rest of the market, as the industry was in a low-valuation position over the past five years. In Chart 1 below, you can see the discrepancy in industry performance, as IBB has been underperforming SPY since 2015. However, look for a new uptrend to begin, as IBB is set to breakout from the flat performance of the past 6-12 months. I think being overweight on the profitable side of this industry would be a good move for the coming 5-10 years, especially when big tech is hit by high interest rates.

Chart 1: The healthcare industry, represented by IBB (IBB), shows patterns of secular growth and decline, and after five years of underperformance compared to the S&P 500, represented by SPY (SPY), is due for a momentum change.

Since clinical trials are the main source of revenues and development for ICON, it is important to track numbers, and this is shown in Chart 2 below. As shown, the number of clinical trials completed is growing rapidly just in the last 10 years, and even the pandemic did little to stop trials. When this data is combined with the fact that both the number of research papers being published and the amount of finance being generated in biotech and pharma is increasing, the data points towards great things to come in the industry. There will of course be a delay between time research gets funded and published, and then enters into clinical trials, the uptrend may start in the next few years, as long as funding and research continues.

ICON may choose to expand heavily into the preclinical market, further supporting revenue growth over the next few years. The company’s Insights page offers a detailed look into what is happening in the industry, and does have a focus on early stage research.

Chart 2: Source. The number of clinical trials continue to rise, an important area of revenues for ICON.

Competitors

There are many names in the CRO industry due to the large healthcare market, and one includes clinic provider Labcorp (LH) which I covered last week. Another large name in the field is IQVIA (IQV), but their $10 billion or more of debt is a large risk factor to worry about moving forward as their profitability is lower than average. This is similar to my thoughts on Syneos Health (SYNH), whose recent performance is not up to industry standard. Additionally, two other strong competitors, PPD (PPD) and PRA Health (PRAH) have been acquired or merged, and these names being engulfed into larger groups removes any benefit to investing in a smaller company.

The funny thing is, one of the involved groups was in fact ICON, with their recent merging with none other than PRAH to create one of the largest CRO companies in the world. PPD was acquired by Thermo Fisher (TMO), and is another solid company to own as well, but is far diversified beyond CRO. Therefore, I find there is little competitive risk to the share price of ICON in the years to come, as their performance is far better, and investors will flock to the strongest pure play.

Expectations

As with my other articles of late, I will provide a quick summary of my share price expectations for the next decade. This is merely to set realistic expectations of what is possible over this time period with varying performance and valuations. For ICON, I expect a small range of revenue growth, mostly in line with the 10 year average of 13%. However, the company expects revenue growth in the high upper single digits, but considering the company has beat expectations over the four years by an average of 2.2%, I will use 10% as a mid-range growth rate. Then, I will go with a bearish growth rate of 8%, to cover potential weakness in the industry if rates rise significantly over the latter half of the decade. However, I find that the probability of the bullish thesis coming true is high, and so I will weigh that sector 50% and 25% for the bearish and neutral scenarios.

Don’t forget that the company is already getting a large bump in revenues in the latter half of 2021 and 2022 due to the PRAH merger, but this does not mean the overall growth rate is increasing. Revenues growth is initiated from the current $6.4 billion in revenues, which includes the influx of $3.2 billion of 2020 FY PRAH revenue. This growth is displayed in Table 1 below:

Growth Scenario

Revenues in 5 Years ($BUSD)

Revenues in 10 Years ($BUSD)

Bearish: 8%

9.4

13.82

Neutral: 10%

10.31

16.60

Bullish: 13%

11.79

21.73

Weighted Average:

10.8

18.47

Table 1: As shown, I expect revenues to reach $5.43 billion in five years, while in 10 years, revenues may reach $9.23 billion. This would account for a 11.17% rate of return over 10 years.

While a low-risk return of 11.17% per year is tantalizing, I must also take into consideration valuation. This is where it gets difficult, as it is hard to determine where valuations will end up at what time. I expect that the current P/E of 35 can be sustained for the short term, with slight appreciation in the bull case. However, historically ICON has seen a wide range of valuations in line with the broader healthcare sector. While not as overvalued as much of the rest of the market, one must consider that the valuation currently is higher than where it will be in ten years.

In the table below, I normalize the average expected returns to a small range of valuations, with the mid range being weighted higher. One must consider the poor performance of the healthcare industry in general over the last five years, and most companies in slow growth industries such as ICON saw record low valuations. If the trend of healthcare spending increases, and a positive secular trend in the industry continues, valuations are likely to go up or remain at the present position.

Value Scenario

5 Year Expected Return

10 Year Expected Return

Low Range: 0.8 to 0.7

21.98

15.0

Mid Range: 0.9 to 0.8

24.9

16.5

High Range: 1.0 to 0.9

27.5

17.9

Weighted Average:

24.8

16.5

Table 2: Once we incorporate changes in valuation, we can see that the PRAH acquisition will lead to significant share price growth over the next few years, and then taper off to a steady clip over the back half of the decade.

Chart 2: The historical price and valuation of ICON over the past decade. Notice the valuation slowly fell over time, rather than any sharp pullback. There also were plenty of gains for investors in the meantime.

Conclusion

In my search for companies that offer a safe bet over the coming decade of uncertainty, I find that ICON meets these criteria. The company offers a wide range of services across the entire healthcare industry, and so, will benefit from any nascent out performer. With innovations such as AI therapy generation, continued work on genomics and CRISPR technologies, and advanced robotics for medical devices, the industry is always growing and ripe to harvest. This provides downside risk, compared to say the renewables vs oil & gas industries, which are reliant solely on the general opinion of the population. Medical innovation is far more neutral in general, especially if ICON does not get dragged into big pharma issues such as pricing and the opioid crisis.

With this, I expect the share price to increase at a sharp clip over the next five years, and with the undervaluation compared to other parts of the market these returns will be above average. Especially important to keep track of is maintained profitability, as if the net income margin returns to the five-year average, the current P/E will decrease by ~15%, further adding to potential gains over the next few quarters. Many will be keeping a watchful eye on the integration of ICON and PRAH, and a jump may be seen with successful earnings later in the year. As such, I believe ICON will be a solid choice for a recurring investment portfolio, to take advantage of the steady nature of this stock over the past ten years.

Thanks for reading, feel free to comment anything below.

This article was written by

Hello, I am an individual investor with an interest in bringing diversification of viewpoints to stock analysis and investing. This brings to point the Japanese proverb 他山之石 -ta-zan-no-ishi- which translates to "another-mountain's-rock" and denotes the importance of diversifying the sources of your knowledge in order to gain the advantage of multiple perspectives. Further, a rock represents the foundational aspects of the world a mountain supports, signifying the importance of understanding the simple fundamentals in order to succeed. As such, I cover a wide range of assets in order to find the best of every type of investing. Please consider following so we can continue down this path of knowledge together, and hopefully, I am able to provide some novel insights for you with every article. Thanks for reading.
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Disclosure: I/we have a beneficial long position in the shares of ICLR, LH, TMO either through stock ownership, options, or other derivatives. 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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