Syneos Health: Nothing Changed After Q3 Earnings, Maintain Hold (NASDAQ: SYNH)


Summary of investments

Nothing has changed in my opinion for Syneos Health, Inc. (NASDAQ:NASDAQ: SYNH) following its third quarter numbers and my previous analysis, where I had noted macro headwinds, with unfavorable valuations going forward. The outlook remains damp, and in my The market is estimated to have reacted accordingly to the company’s tightened FY22 guidance for the upper and lower lines last week.

This is a stock that did next to nothing for equity portfolios in the period from fiscal 2015 to March 2020, before riding the beta-related gains of the past 2-3 years. , reaching all-time highs in FY21.

Following the market sell-off in FY21, investors sold off SYNH shares en masse, resulting in a 65% loss this YTD. The stock has been repriced to trade at just 12.5 times forward earnings. While the (SPX) rebounded from a double bottom in October, SYNH slumped following its missed third quarter results. It is now showing substantial counter-weakness relative to the benchmark.

Alas, SYNH stock price has now passed its pandemic lows and is trading in its deepest trench since listing in FY14′, as shown in Appendix 1. Questions on the issue of Whether this presents as a buying opportunity or not immediately arises, but in my opinion, there is a lack of flesh to put on the skeleton here. With stocks trading in line with our $32 valuation, a lack of upside potential and increased systematic risk make us neutral on this name. Rate hold.

Exhibit 1. SYNH stock price development: now overtaken by pandemic lows, trading at lowest point since IPO


Data: update data

Third quarter figures point to high likelihood of additional sanctions

SYNH’s Q3 numbers illustrate substantial market headwinds on the horizon, in my view. Investors flock to quality factors at the end of FY22 and reposition themselves against names that offer earnings advantages. For SYNH, this is not the case for the future.

Management was equally pessimistic about the company’s results. From CEO Michelle Keefe on the third quarter earnings call:

“I am disappointed to share that Syneos Health experienced stronger than expected headwinds during the third quarter in terms of net rewards, revenue and margins, delivering results well below our expectations and frankly unacceptable.”

In terms of P&L, third quarter revenue tightened 70 basis points year-over-year to $1.34 billion (“billion”). This also missed the consensus estimates. Notably, there was a headwind of 750 basis points from reimbursable expenses in SYNH’s clinical solutions business, itself down 350 basis points year-on-year to $1 billion in revenue. .

Meanwhile, revenue from SYNH’s business solutions business rose 800 basis points year-on-year to $333 million. The division’s growth stems from the strength of the Syneos One portfolio and, conversely, benefited from a tailwind of 380 basis points from reimbursement expenses. This resulted in a net margin of 6.5% and an average quarterly ROE of 8.6%. With stocks trading at 1x book value, investors also realize that same ROE.

The printed numbers align with the longer-term growth trends that SYNH has presented since even before the pandemic. As shown in Figure 2, showing the company’s annual delta to top line, there was a decline in quarterly revenue in particular. Revenue growth has slowed and remains in line with FY18 growth rates, while EPS and free cash flow growth is equally tight.

With SYNH’s operating trends receding, future earnings growth is unattractive. This will likely result in further penalties until SYNH can demonstrate otherwise, in my opinion.

Exhibit 2. SYNH operating trends showing a slowdown from longer-term averages


Data: HB Insights, SYNH SEC Filings

The company’s cost of equity increased significantly in FY22 and is now at multi-year highs of 9.24%. A cost of debt of 3.71% weighted to 44% in fixed capital structure a WACC hurdle of 6.79%, down from Q3 FY22. As Figure 3 shows, this is the highest discount rate range SYNH has faced in years. This has a pronounced effect on SYNH’s return on invested capital (“ROIC”), both to date and down the line.

Moving on to Exhibit 4, the skyrocketing cost of capital has made it increasingly difficult for SYNH to generate added economic value. The Economic Profit Curve [ROIC minus WACC hurdle] reversed in Q2 FY21, and has continued to decline since. It arrived at a negative spread of around 500 basis points in the last quarter, with the ROIC of the TTM reaching only 5.5%, below the WACC of 10.1%. It is now based on a spread of -129 basis points. As such, it looks increasingly difficult for SYNH to generate incremental value above its cost of capital going forward.

Exhibit 3. Rising Cost of Capital as Policy Rates Rebase to Multi-Year Highs, Driving Abnormally High WACC for SYNH

  • SYNH WACC, January FY20’–date


Data: alpha spread, SYNH

Exhibit 4. Rising cost of capital leading to increasing difficulty for SYNH to generate economic added value down the line


Data: HB Insights, SYNH SEC Filings

Market data does not support SYNH’s short-term recovery

As seen in Exhibit 5 [showing weekly bars], SYNH remained in a 44-week downtrend that began in FY21 when prices broke below 50DMA and 250DMA. This coincided with the start of the FY22 bear market in broader equities. The stock has attempted to rally 3 times since then and stabilize, however, each time it encountered low volume in the move. Sideways price action with trending volume down is resistance in my view.

Additionally, the market’s reaction to SYNH’s loss of Q3 earnings can be easily seen on the chart, as stocks moved below the 50DMA with authority over the past week.

Exhibit 5. 44-week downtrend initiated after a price cross with 50DMA and 250DMA


Data: HB Insights, update data

Accordingly, there are several downside targets derived from the dot and number charts as shown below. The price target of $37 has been removed and we are now aiming for downside targets of $23.75

Exhibit 6. Multiple downside targets, pushing towards the $23.75 downside target


Data: update data

Fund ownership has also weakened significantly over the past 2 quarters to date. Institutional funds (ex-ETFs) have increased their exposure to SYNH by around 29% on average since the second quarter of FY22, which is hardly an indication of institutional momentum. There have been a few fundamental value funds that have increased their exposure to multiple tablets. This is not maintained across the board, with a net accumulation of only 36,900 shares for the quarter, as shown in Exhibits 7 and 8.

Exhibit 7. Change in ownership of the fund [by the percentage of shares owned] does not support the institutional dynamic


Data: Refinitiv Eikon

Exhibit 8. Net accumulation is also not favorable

  • SYNH Fund Ownership, Gross Accumulation Across All Funds, Q2 FY22–date.


Data: Refinitiv Eikon

Evaluation and conclusion

Consensus priced SYNH at 13x FY22 GAAP earnings and 7.3x FY22 non-GAAP EPS. We forecast SYNH to print $2.59 per share of earnings for this year , a decrease of 6.8% compared to the TTM. At these levels, SYNH has a TTM earnings yield of 8%, and investors are compensated with an actual risk premium of 6.68% for this cost. Net-net, I see reasonably priced SYNH closed at 12.5 times earnings, implying a price of $32. This would suggest that SYNH has further downsides to come, or at least is reasonably priced at its current levels.

Piece 9.


Data: HB Insights estimates

As a result, SYNH has nothing substantial to suggest a shift in the investment debate. Net-net, I continue to rate the stock as a hold, with no directional view in the market. Syneos Health shares look appropriately priced after the latest selloff, however, there are plenty of benefits to be captured in the name. Assess Syneos Health, Inc. a retainer at $32.

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