ICON Earnings: Strong Outsourcing Demand Supports Long-Term Growth; Shares Fairly Valued

Icon ICLR reported solid third-quarter results, highlighted by revenue exceeding $2 billion, representing an increase of nearly 6% from the prior-year period. We continue to have a positive outlook for the firm, and we maintain our fair value estimate of $243 per share. We reaffirm our narrow economic moat and Medium Uncertainty Ratings for Icon. We view shares as fairly valued, and the stock is currently trading in 3-star territory.

We continue to forecast 2023 revenue will reach about $8.1 billion, representing growth of 5% over 2022. We anticipate high-single digit revenue growth over the next few years thanks to positive clinical research outsourcing trends. We forecast operating margin improvement of about 400 basis points over the next 10 years as Icon scales its operations.

Icon’s narrow moat is supported by high customer switching costs and strong intangible assets, as evidenced by healthy demand for the company’s clinical trial services. Icon’s net business wins were nearly $2.6 billion during the quarter, and it reported a net book/bill ratio of 1.26 times. Icon’s backlog grew to a record $22.2 billion, representing an increase of 10% year over year. We continue to believe Icon’s 2021 acquisition of PRA Health Sciences for $12 billion strengthens the company’s global footprint and creates a more diversified therapeutic portfolio with broader service offerings, further enhancing the company’s narrow moat.

We like that management has focused on paying down debt from its acquisition of PRA Health Sciences, and Icon ended the quarter with a net debt/trailing 12-month adjusted EBITDA ratio of 2.3 times, which is down from 2.5 times at the end of the second quarter and significantly lower from 3.4 times at the end of 2021. Additionally, S&P Global Ratings recently upgraded Icon to an investment-grade credit rating of BBB- with a stable outlook based on operating performance and deleveraging.