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  • Writer's pictureJoel White

DCF Adventures, part 2

Originally published in May 2021 on LinkedIn.


Follow-up comments to last week's DCF report...thanks for everyone's input.


Revenue:

-12-18% growth rate is very aggressive over such a long period

-Growth rate conflicts with the terminal value of 2%. Will the business go from 12% growth straight to 2%?

-2% terminal is far too low for this industry

-bottom line: 10 yr vs terminal growth disconnect implies terminal is understated to keep valuation in a certain range


Gross Profit & EBIT- these dramatic, above-market margin increases are highly unlikely when combined with such high revenue growth, since both acquisitions and taking of market share would be required to achieve the above growth rates (especially in out-years). The main comp used for high EBIT, Medpace, achieved its performance organically.


D&A, CapEx- this report assumes flat amounts for the next 10 years. CROs will not grow in double digits without investing heavily in technology offerings to meet evolving customer needs. CapEx and D&A need to grow aggressively most years.


Change in WC- at those growth rates, a disciplined cash positive company should be driving high WC contributions from customer advances on new projects and subscriptions.


The source of the underlying report is here. Thanks for reading and have a great rest of the week!

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