Science and engineering consultancy Exponent (NASDAQ:EXPO) has massively outperformed the S&P 500 over the last decade with an 836% rise at the time of this writing. It's one of those businesses that, with the benefit of hindsight, seem like such an obvious investment idea: The company's engineers and scientists are known for analyzing the cause of accidents and failures. But is its stock still a good value? Let's look at this question in light of its recent third-quarter earnings.

The case for buying Exponent

Exponent prides itself on having 50% of its staff holding a Ph.D. or M.D. in their chosen field of study. It's a statistic that attests to the core strength of the company: its intellectual capital. In a nutshell, Exponent is a play on the increase in the intellectual quotient of goods and services.

An academic pondering a problem

Image source: Getty Images.

As products and services become increasingly complex, and regulatory demands evermore stringent, there's a growing need to use specialist consultancies to analyze failures and take measures to avoid high-profile mistakes -- think of the Samsung Galaxy Note 7 fire-hazard debacle and public utility PG&E (NYSE:PCG). Exponent is working for PG&E to help reduce risk related to California wildfires, a job that's worth around 4% of Exponent's revenue in the third quarter.

This backdrop gave CFO Rich Schlenker confidence to state during a recent earnings call, "Our expectations over the long term continue to be that we can grow the business in the high-single to low-double-digit growth."

If Exponent can hit its growth aspirations while continuing its excellent track record of margin expansion then earnings could improve dramatically in the next decade. Moreover, Exponent has traditionally spent less than 2% of its revenue in capital expenditures -- a facet of this type of intellectual capital heavy business --so the opportunity to leverage revenue growth into earnings and free cash flow (FCF) is significant.

EXPO Operating Margin (TTM) Chart

EXPO Operating Margin (TTM) data by YCharts. TTM = trailing 12 months.

It all adds up to an impressive investment proposition, and the latest third-quarter earnings saw the company demonstrating progress in line with its aims. For example, the company reported 7% growth in the quarter and on a year-to-date basis, and management expects low- to mid-teens growth in the fourth quarter.

Turning to the outlook for 2020, analysts are expecting revenue growth of 5.3% -- an impressive number considering that "we will clearly have immediately a 1.25% headwind from having that extra week in 2019," Schlenker said on the earnings call. In addition, there could be a revenue headwind from work for PG&E stepping down.

The question is: Does it all make the stock a buy?

Exponent valuation

Exponent may well be a great business, but that doesn't necessarily mean it's a great investment right now. The biggest problem most investors will have is with its valuation. As you can see below, whether you look at price to FCF, price to earnings, or enterprise value (market cap plus net debt) to EBITDA, Exponent is not cheap on either an absolute or a historical basis.

EXPO Price to Free Cash Flow (TTM) Chart

EXPO Price to Free Cash Flow (TTM) data by YCharts

However, investors don't buy growth stocks for their current earnings, but rather for what they could become. Let's play around with some projections to see if the company really is a good long-term value.

A long-term value stock?

First, here's a look at historical revenue growth and FCF conversion from sales. As you can see below, it appears that the market is optimistically focusing on the last few years' strong growth and forgetting about the slow growth period in 2013-2016, part of which coincided with a recession in U.S. industrial production in 2015-2016.

Whichever way you look at it, Exponent is still a business that relies on the economy, and on this basis it makes sense to be conservative on long-term growth rates (the chart shows the average annual revenue growth was 5.5% over the last decade).

Exponent financial metrics

Data source: Exponent presentations. Author's projections.

The bottom line

If Exponent grows revenue at a 5.5% average annual rate after 2020 and the FCF-to-revenue grows at the same average rate during the last decade (an optimistic assumption), then by 2029, Exponent will be generating $665 million in revenue and around $142 million in FCF. Based on the current market cap of $3.3 billion, that means you will have to wait a decade before Exponent will trade at 23 times its FCF.

All told, Exponent's valuation suggests you are going to have to assume a decade of strong growth in the economy in order to get to a valuation that makes the stock look like a good value. But if you are willing to make that assumption, then there are plenty of better value-investing options out there. Exponent is one to put on the watch list for now.