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About West Pharmaceutical Services
Founded in 1923 and headquartered in Exton, Pennsylvania, West Pharmaceutical is an age-old company in an age-old line of business; pharmaceuticals.
Now, while one might initially believe that West Pharmaceutical is basically just another Pfizer or Johnson & Johnson, or a behemoth that develops, manufacturers and sells drugs, you shouldn’t jump to conclusions (you look tired, really, take it easy, jumping can be exhausting) because while the company in question indeed a staple within the pharmaceutical sector, it is a giant in its own category, that of packaging.
Pretty much anything that a physician might need to use in order to inject a patient or safely and securely deposit samples, West Pharmaceutical has it, from needles and specimen containers to specific systems and components that are quite necessary in the medical field, particularly in their role of keeping all sorts of bodily materials and medicines safe, primarily in the setting of a hospital, clinic or pharmacy.
An initial, objective business positive can be found in the fact that this has been proven to be a fairly recession resistant business model, as we have seen before that regardless of one’s financial circumstances or means, people are typically willing to continue paying for the medicines and treatments they need, and as this remains to be the case, a company such as West is a direct beneficiary of said steady and continued demand, not to mention that this company was one of the few that likely performed quite well during the onset of and throughout COVID-19, as demand for medicines and testing equipment skyrocketed across the globe.
Putting COVID to the side, however, we view it as a long, not short-term tailwind for West Pharmaceutical Services and other pharmaceutical companies given that general heightened concerns among the population regarding individual health have dramatically increased, and while it doesn’t really sit right to say that something as catastrophic as a global health crisis was a good thing for a company, we only deal with the facts of the matter over here and given West’s industry position, the markets it operates within and the clients and partnerships it has developed over the years, it has and probably will continue riding this tailwind, especially with the rise of emerging specialty biotechnology companies that will surely need tried-and-true packaging, maybe from a company such as West.
Speaking of clients, some of the company’s more prominent, well known clients include the likes of Pfizer, Merck, Johnson & Johnson, Roche, Eli Lilly and Company, Amgen, AbbVie, Bristol-Myers Squibb, Regeneron and many other pharmaceutical giants, likely locked into long-term contracts with West, which further solidifies confidence in our assumptions that its recent annualized revenues have been moving in the right (and upward) direction, and will in the long run, continue to do so.
Now seems like an opportune time to actually allow the numbers to speak for themselves, so assumptions be darned, let’s get into West Pharmaceutical Services and its finances.
West’s stock financials
In not putting the cart in front of today’s show pony, let’s first delve into the company’s initial metrics and related figures, particularly on the valuation front.
Specifically, trading at a share price of $395.71, West Pharmaceutical maintains a market capitalization of $28.97 billion along with a price-to-earnings (P/E) ratio of 50 while also offering its shareholders an annual dividend in the amount of $0.80, things aren’t looking so tasty on the valuation side of things, with the company’s present price-to-earnings ratio standing well ahead of the generally accepted fair value benchmark of 20, as any higher of a P/E ratio implicates a stock price as trading higher than what it is worth paying for, based primarily on the value of the sum of its parts.
To a large degree, this does make sense, as given all of the spurred demand for the company’s products and services in recent years, its share price has risen just about over 260% over the last five years, delivering an excellent return to shareholders, however, the retroactive investing code has yet to be cracked and when considering the future, while we are evidently bullish on this company and the industry overall in the years and decades to come, the fact of the matter is that this security (NYSE: WST) is trading ahead of itself, or is indeed markedly overvalued.
At times, we will make exceptions when it is a growth company in question and the market is largely untapped, or for other related reasons, however, West is quite the tenured brand and company and while we do think it has indeed been growing its revenue base over the years (we will check on this momentarily), its current price-to-earnings ratio is asking a lot.
Before diving into this company’s revenues, we will first take a gander over at the company’s balance sheet, which is comprised of around $3.8 billion in terms of total assets alongside $949 million in terms of total liabilities, which, for such a storied, huge company, is a fantastic balance sheet breakdown, with its total assets outweighing its total liabilities by a more than considerable margin, the firm seemingly overseeing ample dry powder that can be used to perhaps raise its current dividend, slowly pay down some of its outstanding debts and other liabilities, deploy to repurchase shares, put right back into the business itself and/or explore other growth initiatives externally, through the mergers and acquisitions (M&A) of smaller pharmaceutical packaging companies.
This is a great resource to have at one’s disposal, no ifs ands or buts about it, and candidly, we do hope West Pharmaceutical Services does tack on some more debt so as to grow a bit more aggressively, further penetrating its current markets and customers, primarily because it can easily afford to do so and this is one of the rare occasions in which an older company has the cash to put to work and not merely just play it safe with its capital.
Onto the condition of the company’s income statement, West’s total annual revenues (measuring during and between 2019 and 2023) have been growing each and every year, lending us a slight sigh of relief given that it definitively confirms our initial growth assumptions to be true, starting out at a base of $1.8 billion in 2019, climbing its way up towards its latest reported revenue figure of just south of $3 billion, as reported in 2023.
COVID-19 was an undisputable tailwind, but given this company’s size and scale, we also presume this growth can be attributed to mild, incremental price hikes during the last year or so (a period tattered with inflation and rising interest rates), acting as a more than opportune time for the company to flex its pricing power with both its suppliers and its clients who would really struggle without West’s capabilities and products.
While this is some more than solid revenue growth coming out of such an already established company and category leader, we still certainly find West’s price-to-earnings ratio as being far too ahead of its respective share price, as its revenues just aren’t growing quickly enough to reasonably justify overpaying this much for a slice of the pie.
Happy belated Pi Day, by the way, might I say, 3.14159..well, anyway.
Peering over the company’s cash flow statement, both West Pharmaceutical’s recent annual net income and total cash from operations have been just about as boring and stable as we had initially hoped for and expected, and with that, you’re not going to be hearing any complaints from our side of the screen. For instance, the company’s total cash from operations (between and during 2019 and 2023) have been rising each and every year, starting off at a relative base of $367 million in 2019, rising all the way up towards its latest reported figure of $777 million, as reported in 2023, meaning that through its business services and operations, the company has found ways to extract more and more cash from said operations, which is an unequivocal positive, as being able to organically invest more internally and externally and also pursuing other fruitful initiatives will continue being a direct byproduct of this continued cash flow generation.
West’s stock fundamentals
Might we be so bold as to say ‘let’s keep this concept of cash flowin’?
We might.
In keeping the well from running dry, it’s only right that we take a brief pit stop at this company’s trailing twelve month (TTM) net profit margin, as it is displayed on TD Ameritrade’s platform as 19.52%, which is rather dominant and impressive when pinning it up against the industry’s respective listed average of 7.58%, which is to largely be expected of an industry leader such as this one, but this doesn’t diminish the fact that it is still an impressively sizable TTM net profit margin, meaning that after all of its expenses are paid (think labor, operations, etc..), West still comes out on top about 12% higher than the cumulative average of its peers.
Stepping over the company’s core TTM returns as they pertain to assets and investment(s), West has once again made a statement through besting the industry’s averages on these fronts as well, and handsomely at that.
For example, the company’s displayed TTM return on investment is pegged at 18.41% to the industry’s respective average of 7.88%, which we would classify as being a material difference, supporting the fact that West Pharmaceutical Services has been more intentional with its capital and other available financial resources, say, than the competition more broadly.
Should you buy West Pharmaceutical stock?
This is a mature company with a lot going for it, however, there is something rather insurmountable at the moment that is going against it, and that, ladies and gentlemen, is its current valuation, specifically on the basis of its prevailing price-to-earnings ratio.
Standing at over double the standard, commonly held fair value benchmark of 20, shares of West’s stock (NYSE: WST) are trading at a steep, demanding premium, and although the company’s recent annual revenues have been moving in the right direction and we thoroughly expect them to continue trending upward and rightward in the intermediate and long-terms, they simply have not been growing at a quick enough rate and while its balance sheet is in choice shape, its cash flows have been consistent and predictable for the most part, not to mention that its total cash from operations have been growing on a year-over-year (YOY) basis, and its previously stated margin and return metrics are in stellar shape, I think it would be far from wise, especially in this current market environment, to overpay this much for a slice of the West pi(e).
Hence, the “sell” rating.
DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.
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