Since its formation as the result of a 2016 merger, Iqvia Holdings Inc. (IQV, Financial) has achieved commendable performance. In fact, the combination of its strong business results with its attractive valuation have resulted in it meeting the strict criteria for GuruFocus' Buffett-Munger Screener.
However, this growth has come at a cost. The company has really loaded up on debt, resulting in an unstable balance sheet. Is the valuatlion really worth the weak financials? Let's take a look.
About Iqvia
With more than 1.2 billion non-identified patient records, Iqvia has what it considers to be one of the largest and most comprehensive collections of health care information in the world. Those records cover “comprehensive, longitudinal, non-identified patient records spanning sales, prescription and promotional data, medical claims, electronic medical records, genomics, and social media.”
In its 10-K for 2021, the company said:
“Based on this data, we deliver information and insights on over 85% of the world’s pharmaceuticals, as measured by 2020 sales. We standardize, curate, structure and integrate this information by applying our sophisticated analytics and leveraging our global technology infrastructure. This helps our clients run their organizations more efficiently and make better decisions to improve their clinical, commercial and financial performance. The breadth of the intelligent, actionable information we provide is not comprehensively available from any other source and our scope of information would be difficult and costly for another party to replicate.”
Iqvia has three complementary operating segments:
- Technology and Analytics Solutions: This refers to a range of cloud-based applications that are sold as Software as a Service (SaaS) solutions. These solutions support a wide range of commercial and clinical processes.
- Research and Development Solutions: Staff help conduct and coordinate multi-site clinical trials. Services include protocol design, feasibility and operational planning.
- Contract Sales and Medical Solutions: This unit engages with health care providers and patients, helping the former to handle tasks such as stakeholder solutions and contract sales. Patient engagement involves nurse-based programs that help patients with disease management, medication understanding and reimbursement issues.
Competition
The competition varies by business segment and by country, but some large, publicly traded competitors include Accenture PLC (ACN, Financial), Syneos Health Inc. (SYNH, Financial) and UDG Healthcare (UDG).
Although Iqvia does not list its competitive advantages in its SEC filings, there are a few that I have identified by looking through the company's investor materials. Owning one of the world’s largest health care databases must rank at or near the top. It also has a brand name that will be well known in its markets, and it has proprietary knowledge, including patents.
The net margin and returns on equity and invested capital are better than average for the medical diagnostics and research industry, but not best in class. I think this is a worrying sign for investors.
Financial strength
The financial story revolves around debt. Including the pre-merger years, the company has grown its long-term debt by an average of 26% per year:
We see the effects of that debt on the financial strength table below, with red bars for several key metrics. Iqvia’s debt-to-equity ratio, for example, is ranked worse than 94.36% of the other 195 firms in the medical diagnostics and research industry:
Similarly, the interest coverage ratio is low at 5.03. That’s adequate, but hardly reassuring for potential shareholders.
A low Altman Z-Score of 2.2 also raises concern. On this scale, any score below 1.8 is considered highly risky, while a score above 3.0 indicates safety. With a score of 2.2, Iqvia is on the lower end of the grey zone.
On the other hand, a relatively high Piotroski F-Score means management is handling its debt structure well.
Overall, the stock gets a GuruFocus financial strength score of 5 out of 10. Iqvia’s financial strength ranking is hardly superb, but it is comparable or only slightly lower than its peers and competitors in the industry:
The company also does not pay a dividend and may not in the near future because some of its debt conditions rule that out.
Quality analysis
The Buffett-Munger screener criteria are as follows: a high GuruFocus business predictability rank, competitive advantages, having incurred little debt while growing the business and being undervalued based on the PEG ratio (which is the price-earnings ratio divided by the five-year Ebitda growth rate).
Iqvia scores highly on the business predictability scale with a 4.5 out of 5 star ranking for the consistency of its revenue and earnings. That’s illustrated by this chart of the company’s revenue growth:
The Ebitda chart displays consistent Ebtida growth as well:
Finally, let’s look at earnings per share without non-recurring items:
The second criterion is competitive advantages, and as we saw above, Iqvia has them based on its ability to help its clients grow and prosper. As the company noted in a July 6 news release:
“Iqvia creates intelligent connections across all aspects of healthcare through its analytics, transformative technology, big data resources and extensive domain expertise. Iqvia Connected Intelligence™ delivers powerful insights with speed and agility — enabling customers to accelerate the clinical development and commercialization of innovative medical treatments that improve healthcare outcomes for patients.”
Curiously, the company has made it through the Buffett-Munger screener with a sizable debt load and an interest coverage ratio that is low. While the screener criteria do not rule these factors out, I find it surprising that such a debt-ridden company can be so profitable.
Valuation
Iqvia has seen its share price fall significantly since late last year, although it has made something of a recovery over the past month:
The PEG ratio stands at 1.86, which is above the fair value mark of 1.00 but still within the boundaries of the screener.
Given the strength of its business predictability ranking, I decided to use the discounted cash flow calculator to get another measure of fair value. I estimate the company will see an earnings growth rate of 23% in the coming years, making the stock modestly undervalued. I used a discount rate of 10%.
Conclusion
Iqvia Holdings has some promise for investors based on growth and value, but nothing too compelling in my opinion because I am not a fan of the debt situation and lack of dividend. The PEG ratio is also a little on the high side. Other, higher-quality companies have dropped to better valuations this year.
