Investing in biotech stocks can be a very risky venture. For investors, a safer approach may be to buy shares of a company that indirectly benefits from growth in that sector. That's the appeal of Syneos Health (SYNH).
The company helps biotech companies with clinical studies and provides consulting services. It's also known as a contract research organization (CRO). With a market cap of around $7 billion, it's still a fairly modestly-sized company that may be a good alternative for investors who don't want to take on a lot of risk. Let's take a look at how Syneos' stock has performed and whether it's a good option for investors today.
Is there enough growth left?
Syneos has achieved impressive results over the years, with its revenue more than doubling from $1.6 billion in 2016 to $4.4 billion in 2018. However, its growth rate has started to stumble in 2019. During the first nine months of 2019, the company generated revenue of $3.5 billion, an increase of only 6.7% from the prior-year period. While it's still a good rate of growth, it may be a bit challenging to win growth investors over with those numbers. The company does have a backlog of revenue of more than $8.3 billion as of Sept. 30, 2019, although that's only 6.5% higher than the same time last year. Syneos only expects to recognize $0.98 billion of that before the end of 2019.
In October, the company slightly adjusted its revenue guidance for the full year of 2019. From a previous range between $4.64 billion and $4.75 billion in revenue, Syneos dropped its expectations to between $4.63 billion and $4.69 billion. It's not a significant drop, but at $4.69 billion for the full year, it would again come in at a growth rate of 6.8% for the year. Given how quickly revenue has grown, it could be a sign that Syneos is running out of growth, and that could be a problem for investors who may have been hoping for the company's top line to continue soaring.
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Why it could still make for a good value buy
Even if Syneos doesn't appeal to investors looking for high growth, there's a lot of appeal from a value perspective. Over the past nine months, Syneos has made a $40 million profit on sales of $3.5 billion. And while that's a fairly small margin, analysts are expecting a lot more from the company. Although Syneos trades at more than 80 times its earnings over the trailing twelve months, its forward price-to-earnings ratio is just 18, indicating that analysts are expecting profits to improve over the next year.
Going even further out, using the price-to-earnings-growth (PEG) ratio, which factors in earnings growth for the next five years, Syneos comes in at a multiple of just 1.6. Typically, investors look for a stock to trade at one or less. This suggests Syneos isn't too expensive given its earnings growth, and with the stock also trading at only 1.5 times its sales, investors aren't paying much of a premium for sales or future earnings.
Should you buy Syneos today?
Syneos' stock rose 24% over the past 12 months, soundly outperforming the 14% return of the Health Care Select Sector SPDR Fund during that time. The stock has been doing fairly well, but one of the dangers for investors is that it's lacked consistency. Relying on future earnings can be dangerous because if a company misses expectations, those valuations and numbers all go out the window.
Syneos still has a long way to go in proving that it can be a reliable investment. While the business appears to be sound and generating steady growth, investors may want to hold off for at least another few quarters to see that earnings are improving sufficiently enough to show that it is on track to meet expectations and can stay in the black.
Until then, the healthcare stock is still too much of a wildcard to invest in.
