Syneos Continues to Face Headwinds but Remains Undervalued for Long-Term Investors

Narrow-moat Syneos SYNH reported fourth-quarter results largely in line with our expectations. Full-year revenue of nearly $5.4 billion represented a 3.5% increase from the prior year. The company continues to face headwinds, including foreign-exchange fluctuations, delays in backlog conversion, decreases in net new business awards, and a year-over-year decline of 12.4% in clinical solutions backlog. While macroeconomic disruptions, such as foreign-exchange headwinds, are also affecting Syneos’ peers, there continues to be some Syneos-specific challenges impacting the business that management is working to rightsize.

After updating our model, we maintain our fair value estimate of $55 per share, which reflects a nearly 6% decline in revenue in 2023 and a stabilized, low-single-digit revenue growth over the next few years. Syneos is currently trading at a 28% discount to our fair value estimate, which we believe is an attractive entry point for long-term investors with a high degree of risk tolerance as management continues to work through its business challenges.

We reiterate Syneos’ narrow economic moat rating, which is based on intangible assets from its clinical trial segment and high customer switching costs. Syneos’ key intangible assets include multinational regulatory knowledge and expertise in complex clinical trials, including disease areas such as oncology and neurology. Syneos offers efficient and high-quality trials, which enforces switching costs for its biotech and pharma customers.

We have updated Syneos’ Uncertainty Rating to Very High from High due to the headwinds the company faces. Management hopes Project Velocity, its multiyear effort to rightsize the business, will further catalyze the company’s ForwardBound efforts, which launched in 2019. Management plans to accelerate innovation, digital transformation, quality, and margin expansion through Project Velocity by transforming its cost structure and optimizing its operational footprint.