Stock Analysis & Ideas

West Pharmaceutical Services (NYSE:WST): A Mediocre, Risky COVID-19 Stock

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West Pharmaceutical Services investors enjoyed a windfall as the COVID-19 pandemic took hold. Now that the worst is probably behind us, though, it’s time to question the value proposition of WST stock.

West Pharmaceutical Services (NYSE:WST) isn’t entirely dependent on the COVID-19 pandemic for its success. However, WST is a risky play, and I am neutral on the stock. The company’s business model relies heavily on the spread of infectious diseases, and multiple metrics suggest that West Pharmaceutical Services isn’t undervalued at all.

West Pharmaceutical Services supplies injectable drug delivery systems and related products. As we’ll discover, investors bought WST stock hand over fist for a while, but that’s history now. What remains is a company with financials that are mediocre at best and dividends that won’t impress finicky income seekers. There are plenty of healthcare companies out there to consider investing in, and if West Pharmaceutical Services doesn’t offer a clear-cut case for a comeback, then it’s fine to just leave it alone.

Don’t misunderstand – West Pharmaceutical Services isn’t likely to go bankrupt or anything like that. However, if you’re looking for a must-own healthcare stock for 2023, WST probably doesn’t fit the bill.

WST Stock Looks Like a Post-COVID Pop-and-Drop

What I typically look for in a long-term buy-and-hold stock is steady, reliable growth. In contrast, WST stock looks more like a product that’s past its expiration date. West Pharmaceutical Services might have been a darling of the markets during the onset of COVID-19, but that catalyst has faded since mid-2021.

In its latest investor presentation, West Pharmaceutical Services makes it crystal clear where its revenue comes from. According to the company, 22% of West Pharmaceutical Services’ 2016 sales derived from its Biologics business; that figure jumped to 41% in 2021 and 42% during the first nine months of 2022.

The company defines “Biologics” as “packaging solutions for sensitive
molecules and self-injection technologies,” which is separate from West Pharmaceutical Services’ Generics, Pharma, and Contract Manufacturing divisions. In the same presentation, the company acknowledges that its organic net sales growth “has been fueled by increasing demand for High-Value Products (HVPs), especially by Biologics customers.”

Here’s where skeptical investors need to read between the lines. When I saw the phrase “increasing demand for High-Value Products,” I read this as “the pandemic,” even if West Pharmaceutical Services doesn’t say it outright. Moreover, the company seems to be bracing for “an expected decline in COVID-19 related sales in 2023.”

Granted, there have been on-again, off-again COVID-19 infection surges in China. However, only 9% of West Pharmaceutical Services’ net sales are derived from the Asia Pacific region. This helps to explain why WST stock rallied from $150 in late 2019 to an eye-watering $465 in 2021 but is now trading closer to $260. This, frankly, looks more like a falling knife than a compelling bargain.

West Pharmaceutical Services’ Metrics Aren’t Stellar

WST stock could fall much further, as West Pharmaceutical Services’ recent financial results don’t indicate robust growth. West Pharmaceutical Services might be a competitive, ambitious innovator – but it might also be a company that got lucky during the onset of COVID-19. Besides, when we glance at the company’s vital signs, we’ll uncover stats that won’t likely pique the interest of cautious investors.

First of all, anyone who bought WST stock near the peak is really struggling right now, and West Pharmaceutical Services’ dividend payment won’t provide much consolation. The company’s 0.29% dividend yield is better than nothing, but not anything to write home about.

Is WST stock a terrific bargain after its share-price drop, though? Not really, as West Pharmaceutical Services’ 30.2x P/E ratio isn’t extremely high but isn’t bargain-basement low, either (though it might be worth revisiting if the P/E ratio falls below 20x). Meanwhile, the company’s 7.9x price-to-book (P/B) ratio is too high for my taste (I prefer below 3x), and its 8.52x price-to-sales (P/S) ratio needs to get below 2x before I’ll bother to take another look at WST stock. Also, these valuation multiples are all higher than their respective medians for the sector, proving that WST stock likely doesn’t present great value.

Turning to West Pharmaceutical Services’ third-quarter 2022 financial performance, the company’s net sales, net income, and balance of cash and cash equivalents declined on a year-over-year basis. Additionally, West Pharmaceutical Services lowered its guidance ranges for Fiscal 2022 in terms of both net sales and adjusted diluted EPS.

Is WST Stock a Buy, According to Analysts?

Turning to Wall Street, West Pharmaceutical Services is a Hold based on one Buy and three Hold ratings. The average WST stock price target is $266.25, implying 3.2% upside potential.

Conclusion: Should You Consider WST Stock?

West Pharmaceutical Services isn’t a terrible company by any means. There will certainly be a need for injectable drug delivery systems in 2023, but without the COVID-19 catalyst, it’s hard to envision West Pharmaceutical Services becoming a darling of the market again.

Therefore, it’s wise to maintain a neutral stance on WST stock. Unless some major health-related event “injects” West Pharmaceutical Services with a windfall revenue source, the best policy is probably to seek healthcare-market wealth elsewhere.


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