West Pharmaceutical Services has followed the market’s trajectory closely, rising in tandem with the S&P 500 over the past six months. The stock has climbed by 16.3% to $260.31 per share while the index has gained 18.6%.

Is there a buying opportunity in West Pharmaceutical Services, or does it present a risk to your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is West Pharmaceutical Services Not Exciting?

We don't have much confidence in West Pharmaceutical Services. Here are three reasons why WST doesn't excite us and a stock we'd rather own.

1. Lackluster Revenue Growth

Long-term growth is the most important, but within healthcare, a stretched historical view may miss new innovations or demand cycles. West Pharmaceutical Services’s recent performance shows its demand has slowed as its annualized revenue growth of 1.6% over the last two years was below its five-year trend.

2. Shrinking Adjusted Operating Margin

Adjusted operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies because it excludes non-recurring expenses, interest on debt, and taxes.

Analyzing the trend in its profitability, West Pharmaceutical Services’s adjusted operating margin decreased by 3.9 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 20.4%.

3. New Investments Fail to Bear Fruit as ROIC Declines

ROIC, or return on invested capital, is a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, West Pharmaceutical Services’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

West Pharmaceutical Services’s business quality ultimately falls short of our standards. That said, the stock currently trades at 38.8× forward P/E (or $260.31 per share). At this valuation, there’s a lot of good news priced in - we think other companies feature superior fundamentals at the moment. Let us point you toward one of our top digital advertising picks.

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