This Healthcare Services Stock Has 37% Upside -- Barrons.com

By Todd Chanko

By the time any of us stop by our local pharmacy to pick up a medication, the treatment has undergone numerous clinical trials before receiving regulatory approval as a safe and efficacious medication. Well-known pharmaceutical companies such as Merck and Pfizer typically manage this complex process in house. However, smaller biotechs without sufficient resources outsource the clinical trial stage to a contract research organization, or CRO.

Medpace Holdings, which targets oncology, metabolic, cardiology, central nervous system, and anti-infective therapies, raised its 2026 revenue guidance on July's second-quarter conference call to a midpoint of $2.85 billion, corresponding to a year-over-year increase of 13%. That cured the market of its Medpace malaise that followed the company's first-quarter call in April: The stock plummeted 23% on April 23 after management said forecasting 2027 revenue would be difficult and that backlog cancellations were on the rise.

Three months later, Medpace is in the pink: On the heels of second-quarter earnings, the stock is up 14%. The company's repeat customer rate of 80%, a 28% year-over-year increase in new business awards in the second quarter, and the acceleration of new drug development in part fueled by artificial intelligence could stimulate a 37% rise in the stock over the next 12 months.

"I anticipate that our gross bookings, into which we have reasonable insight, are going to scale, and in the second half are going to ramp up, " August J. Troendle, chairman and CEO of Medpace, told investors on the company's earnings call last month.

The company's second-quarter results mirror Troendle's optimism: Margins on earnings before, interest, taxes, depreciation, and amortization, or Ebitda, expanded 0.55 percentage point sequentially to 21.7%. Ebitda itself increased 18% year over year to $153 million, diluted earnings leapt 37% over the same period to $4.25 per share, and backlog grew 4.9% to slightly more than $3 billion. Management not only raised 2026 revenue guidance, but also boosted its forecast for the full year's earnings per share: it now expects about 15% EPS growth to $17.60, a 51-cent jump from prior guidance.

"Revenue growth for Medpace remains among the strongest in the CRO industry," says Kelly Ranucci, a portfolio manager at Stephens Investment Management, which holds $111 million worth of Medpace stock. "We also like that their cancellation rates have moderated, win rates have improved, bookings are accelerating, and mix toward the crowded metabolic space is shrinking."

The majority of Medpace's customers -- small to medium-size biotechs -- don't have the capacity to cultivate their compounds into FDA-approved pharmaceuticals. To pursue bringing their discoveries to market, they need a CRO. Larger companies such IQVIA Holdings focus on partnering with global pharmaceutical conglomerates, while others such as Fortrea Holdings cover a wider range of therapeutic areas and so may lack the deep expertise in Medpace's niche. Medpace is staffed with experts on all aspects of FDA approval, including scientists, physicians, lawyers, and others knowledgeable about the regulatory landscape.

"Medpace can do it quickly, effectively, providing all the data these small biotechs need to report," says Matt Spiegel, an analyst at GW&K Investment, which holds about $109 million worth of shares. "And they do it in a way that's relatively cost-effective."

Medpace designs the studies, recruits volunteers, administers the trials, evaluates the results, and ultimately presents findings to the FDA. It even owns four labs, which reduces variable cost and allows for greater control. "This full-service model really suits their client needs. They have a very high repeat business rate," says Jasmine Zhang, an analyst for the FullerThaler Behavioral Mid-Cap Equity fund, which holds about $44 million worth of shares . "That shows how they're delivering really good results."

Fears that AI could disrupt the successful business model honed over 30 years by Medpace are misplaced. "AI is helping accelerate drug discoveries, which should help more biotechs reach Phase I status," says Raife Giovinazzo, Zhang's colleague at FullerThaler. "That expands the addressable market overall as smaller biotechs will also need to undertake Phase I trials." Adds Stephen's Ranucci, "Human biology is extremely complex, which explains why a drug might work for one person and not another. AI or machine learning can help solve these dilemmas more quickly and efficiently."

AI could eventually pose a threat to Medpace should the clinical trial process eventually become fully automated, accessible, and affordable for even the smallest biotech companies. Moreover, the waves of AI-driven drug discoveries predicted may never lap our shores -- with fewer clinical trials needed as a result.

Medpace finished its second quarter with $503 million in cash and equivalents and has negligible net debt. It pays no dividend but generates a free-cash-flow yield of 4.2%. FullerThaler's Raife is particularly enthusiastic about the company's resumption of its share repurchases, citing its "very clean balance sheet." The company, which repurchased no shares in the first quarter, bought $295 million worth of stock in the second quarter, returning about 1.8% to shareholders. It has $527 million remaining under its current repurchase authorization, a potential 3.2% return of capital to shareholders.

The stock trades at a 12-month forward price/earnings multiple of 32, slightly higher than its historical average but lower than its current 35 times. A discounted cash-flow valuation, using a weighted-average cost of capital of 9.3%, a perpetual growth rate of 3%, and a terminal value of $18 billion, results in a 12-month stock price of $821 -- about 37% above current levels.

The results are clear: Medpace shares have been approved for investment purposes.

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August 13, 2026 08:01 ET (12:01 GMT)