Medical Instruments & Supplies company West Pharmaceutical Services is taking Wall Street by surprise today, falling to $327.24 and marking a -8.6% change compared to the S&P 500, which moved -1.0%. WST is -18.33% below its average analyst target price of $400.71, which implies there is more upside for the stock.
As such, the average analyst rates it at buy. Over the last year, West Pharmaceutical Services shares have outstripped the S&P 500 by 38.0%, with a price change of 48.0%.
West Pharmaceutical Services, Inc. designs, manufactures, and sells containment and delivery systems for injectable drugs and healthcare products in the Americas, Europe, the Middle East, Africa, and the Asia Pacific. The company is part of the healthcare sector. Healthcare companies work in incredibly complex markets, and their valuations can change in an instant based on a denied drug approval, a research and development breakthrough at a competitor, or a new government regulation. In the longer term, healthcare companies are affected by factors as varied as demographics and epidemiology. Investors who want to understand the healthcare market should be prepared for deep dives into a wide range of topics.
West Pharmaceutical Services's trailing 12 month P/E ratio is 47.6, based on its trailing EPS of $6.87. The company has a forward P/E ratio of 37.1 according to its forward EPS of $8.83 -- which is an estimate of what its earnings will look like in the next quarter. As of the first quarter of 2023, the average Price to Earnings (P/E) ratio for US health care companies is 24.45, and the S&P 500 has an average of 15.97. The P/E ratio consists in the stock's share price divided by its earnings per share (EPS), representing how much investors are willing to spend for each dollar of the company's earnings. Earnings are the company's revenues minus the cost of goods sold, overhead, and taxes.
To better understand WST’s valuation, we can divide its price to earnings ratio by its projected five-year growth rate, which gives us its price to earnings, or PEG ratio. Considering the P/E ratio in the context of growth is important, because many companies that are undervalued in terms of earnings are actually overvalued in terms of growth.
West Pharmaceutical Services’s PEG is 10.14, which indicates that the company is overvalued compared to its growth prospects. Bear in mind that PEG ratios have limits to their relevance, since they are based on future growth estimates that may not turn out as expected.
An analysis of the company's gross profit margins can help us understand its long term profitability and market position. Gross profits are the company's revenue minus the cost of goods only, and unlike earnings, don't take into account taxes and overhead. Here's an overview of West Pharmaceutical Services's gross profit margin trends:
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2023 | 2,866,000 | 1,773,200 | 38 | -2.56 |
| 2022 | 2,886,900 | 1,750,700 | 39 | -7.14 |
| 2021 | 2,831,600 | 1,655,800 | 42 | 16.67 |
| 2020 | 2,146,900 | 1,379,100 | 36 | 9.09 |
| 2019 | 1,839,900 | 1,234,200 | 33 | 3.12 |
| 2018 | 1,717,400 | 1,172,000 | 32 |
- Average gross margin: 36.7 %
- Average gross margin growth rate: 3.0 %
- Coefficient of variability (lower numbers indicating more stability): 25.7 %
West Pharmaceutical Services's gross margins indicate that its underlying business is viable, and that the stock is potentially worthy for investment -- as opposed to speculative -- purposes.
When we subtract capital expenditures from operating cash flows, we are left with the company's free cash flow, which for West Pharmaceutical Services was $396.8 Million as of its last annual report. This represents the amount of money that is available for reinvesting in the business, or for paying out to investors in the form of a dividend. With its strong cash flows, WST is in a position to do either -- which can encourage more investors to place their capital in the company. Over the last four years, the company's free cash flow has been growing at a rate of 13.7% and has on average been $314.93 Million.
Another valuation metric for analyzing a stock is its Price to Book (P/B) Ratio, which consists in its share price divided by its book value per share. The book value refers to the present liquidation value of the company, as if it sold all of its assets and paid off all debts). West pharmaceutical services's P/B ratio is 8.8 -- in other words, the market value of the company exceeds its book value by a factor of more than 8, so the company's assets may be overvalued compared to the average P/B ratio of the Health Care sector, which stands at 4.16 as of the first quarter of 2023.
West Pharmaceutical Services is likely fairly valued at today's prices because it has an inflated P/E ratio, an elevated P/B ratio, and generally positive cash flows with an upwards trend. The stock has strong growth indicators because of its decent operating margins with a positive growth rate, and an inflated PEG ratio. We hope this preliminary analysis will encourage you to do your own research into WST's fundamental values -- especially their trends over the last few years, which provide the clearest picture of the company's valuation.
