**** Hambrecht & Quist **** Hambrecht & Quist **** Hambrecht & Quist ****
Company: Parexel Intl Corp
Price: 22.5
Recommendation: BUY
Notes: a,
Firm: Hambrecht & Quist
Department: Healthcare
Industry: Healthcare Services
Date: 3/3/99
Q1 Q2 Q3 Q4 FY
1998A 0.18 0.19 0.21 0.22 0.79
1999E 0.22a 0.21a 0.23 0.27 0.93
2000E 0.28 0.29 0.31 0.34 1.22
52-Week Range 20-46 ** Market Cap 564.8
Shares Out 25.1 ** _____ _____
_____ _____ ** _____ _____
_____ _____ ** FY Revs 285.4
CY EPS 0.85 ** CY P/E 26.5
Adding PRXL to Focus List; Reiterate BUY
We are adding PAREXEL to our Focus List. We believe investors have an
overly-pessimistic outlook on the March quarter. Investors will particularly
scrutinize four metrics in the upcoming earnings report: earnings growth, new
business signings, margin trends and growth in accounts receivable. We expect
positive news in each. The stock should experience substantial multiple
expansion as growth accelerates in the latter half of CY1999.
In our view PAREXEL remains undervalued relative to the company's growth
prospects and strong positioning as one of the elite in the robust
pharmaceutical outsourcing sector. We believe investors are especially
concerned about the outlook for the March quarter. Such concern is
understandable in view of the fact that both the September 1998 and December
1998 quarters came in slightly below consensus estimates, and each showed
slowing revenue and earnings growth. Also, operating margins ticked down 100
basis points sequentially in the December quarter. We believe, however, that
these unfavorable trends will begin to reverse in the March quarter, and PAREXEL
will continue to gain momentum in the latter half of CY1999. We note also that
PAREXEL has been without an investor relations manager for some months, and the
slowdown in communication between the company and the Street may have
contributed to the decline in the stock price recently.
Investors will particularly scrutinize four metrics in the upcoming earnings
report: earnings growth, new business signings, margin trends and growth in
accounts receivable. We expect positive news in each. Specifically:
Earnings Growth: We expect the company to meet or exceed our EPS estimate
of $0.23. The range of Street estimates is currently $0.23 to $0.25, with
consensus at $0.24. We believe that if the company reports $0.23 it will not be
interpreted as an earnings miss (recalling that PAREXEL's stock price rose
sharply after reporting $0.21, a penny below consensus, in the December
quarter).
New Business: We expect that the robust demand, and the company's
beefed-up marketing resources, will likely result in strong new business
authorizations. While new business can be volatile from quarter to quarter, we
believe the company is on track (though not guaranteed) to exceed the record
$120 million signed in the December quarter. We expect that PAREXEL, though
under no obligation to report new business each quarter, will choose to do so at
least for the next couple of quarters.
Margins: The disquieting deterioration in gross and operating margins
witnessed in the December quarter should begin to reverse. We understand that
the margin compression has been a result of adding capacity, not pricing
pressure, and that margins will improve as revenues grow.
Accounts receivable: The December quarter saw a fall in accounts
receivable DSOs from 65 to 56 days, and we expect this positive trend to
continue as the company maintains a focus on improving cash collections.
In the last nine months of CY1999 PAREXEL signed about $343 million in new
business, 36% more than the company's revenue during that period. In contrast,
in the previous nine months (from July 1997 to March 1998), the company was
signing new business only a little faster than it was recording revenue
(book-to-bill of 1.09). Just as that period of soft new business signings led
subsequently to the slower revenue and earnings growth witnessed over the past
two quarters, we expect that the very strong recent new business trends will
translate into accelerating growth in the latter half of CY1999. We anticipate
that the stock should experience substantial multiple expansion as growth
accelerates. At a recent price of $22 1/2, PAREXEL shares trade at only 20.8
times our CY1999 EPS estimate of $1.08, and 16.5 times our CY2000 estimate of
$1.36, a substantial discount to growth and to its peer group. We reiterate our
BUY rating and add PAREXEL to our Focus List.
1999 Copyright Hambrecht & Quist LLC. All rights reserved. The information
contained herein is based on sources believed to be reliable but is neither
all-inclusive nor guaranteed by our firm. Opinions reflect our judgment at this
time and are subject to change. We do not undertake to advise you of changes in
our opinion or information. In the course of our regular business, we may be
long or short in the securities mentioned and may make purchases and/or sales of
them from time to time in the open market, as a market maker, or otherwise. In
addition, we may perform or seek to perform investment banking services for the
issuers of these securities. Most of the companies we follow are emerging and
mid-size growth companies whose securities typically involve a higher degree of
risk and more volatility than the securities of more established companies. For
these and other reasons, the investments discussed or recommended in this report
may be unsuitable for investors depending on their specific investment
objectives and financial position. This report is not a recommendation or a
solicitation that any particular investor should purchase or sell any particular
security in any amount, or at all.
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or developing events or situations regarding companies or industries covered.
These reports are made available to interested clients of H&Q on a request
basis. They often contain only partial information in very brief, often in
outline form; their purpose is to provide rapid information and preliminary
evaluations of such events or situations which may very rapidly be changed as a
result of subsequent additional information and analysis.
Note Legend:
(a) Hambrecht & Quist LLC maintains a market in these stocks.
(b) Hambrecht & Quist LLC has been an underwriting manager, or co-manager, or
has privately placed securities of these companies within the last three years.
(c) Hambrecht & Quist LLC has an investment position in these companies.
(d) A Hambrecht & Quist LLC employee is a director of these firms.
(e) The analysts covering these stocks have investment positions.
(f) Options are available on these issues.
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ownership of more than 5% of the outstanding equity securities of these
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(h) Hambrecht & Quist LLC acts as a financial advisor to this company.
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designate a company in registration.
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