(Photo Illustration by Igor Golovniov/SOPA Images/LightRocket via Getty Images)
LightRocket via Getty Images
Shares of Syneos Health (SYNH) gained more than 9% today after the company reported better-than-expected results for the final quarter of 2022 this morning. Specifically, bolstered by greater demand from large pharmaceutical customers and for its deployment solutions, revenue and adjusted earnings for the period fell just 1.0% and 16.9% from the prior year to $1.36 billion and $1.23 per share. This exceeded analysts’ expectations by $70.5 million and 3 cents per share, respectively, even as unfavorable foreign currency translation cut 2.7 percentage points from the top line.
However, I believe the bigger driver of today’s post-earnings strength is the sequential improvement in new business awards. The lack of the latter was largely responsible for the epic collapse suffered by SYNH’s stock last November after reporting results for the third quarter of 2022 that missed expectations and seeing exceedingly weak order activity during the period—with new business awards (excluding reimbursable out-of-pocket expenses) totaling just $431.4 million or less than a third of the revenue recognized during the period. Along with SYNH’s own admission that its clinical operating model has not been agile enough for some of its customers—especially within the post-clinical market—and had begun to negatively impact its opportunities for repeat business, this likely had some fearing that the soft new business trends could persist.
The good news is net new business awards totaled $664.9 million, which marked a 54.1% increase from Q3. This includes a return to strong bookings in SYNH’s Commercial Solutions business of $396.0 million, which was up 77.6% sequentially, down just 5.8% year-over-year and led to a healthy book-to-bill ratio of 1.43 for the quarter. The improvement in the company’s more troubled Clinical Solutions segment was less dramatic, but it still enjoyed a 29.0% sequential jump in new awards to $268.9 million.
Of course, this doesn’t mean that SYNH is out of the woods. Indeed, the company’s overall book-to-bill ratio for the quarter of 0.69 still indicates that it’s burning through its existing backlog of business faster than it’s able to replace it. This is why SYNH ended the period with total backlog at $6.75 billion, which is down 9.5% from the same point a year earlier. It’s also why the company is currently forecasting revenue and adjusted earnings of $4.975-5.175 billion and $3.26-3.53 per share for 2023. At the midpoint, this reflects declines of 5.9% and 28.1% from the prior year and falls short of the $5.138 billion in revenue and $3.79 in earnings per share analysts had been anticipating.
But one reason for the sizable drop in earnings is due to the greater investments SYNH will continue to make to rebuild its relationship with some of its customers. This is especially true within the small and mid-cap (SMID) biopharmaceutical and oncology markets, which had been most responsible for the strong growth the company achieved in the years prior, but where the slowdown in new award activity has also been most pronounced over the past several quarters. Given the sequential improvement in SYNH’s new business win rate seen in Q4 from the more efficient and effective delivery model that has already resulted from the actions taken to date—which include reducing the complexity of the company’s full-service operating model, streamlining its organizational structure, enhancing customer engagement and incorporating more innovation and insights in its clinical operations—I think that’s the right approach.
More importantly, I expect the increasing payoff from these actions to continue driving a recovery in new business awards that eventually puts SYNH back on a path towards sustained profit growth. And while this could take some time, the significant upside offered by its stock—which remains down more than 50% from its 52-week high (even after today’s nice bounce) and trades at less than 12 times the midpoint of the company’s 2023 earnings forecast and at a steep discount to both its five-year average forward P/E ratio and the overall market—makes it worth the wait in my view.
Taesik Yoon, CFA is the editor of the Forbes Special Situation Survey and Forbes Investor investment newsletters. Syneos Health (SYNH) is a current recommendation in the Forbes Investor. To access this and the other stocks being recommended through the Forbes Investor, click here to subscribe.