After An 80% Rally, Time To Book Profits In West Pharmaceutical Stock?

WST: West Pharmaceutical Services logo
WST
West Pharmaceutical Services

After a 80% rise since the March 23 lows of this year, at the current price of around $233 per share we believe West Pharmaceutical Services (NYSE:WST), best known for injectable pharmaceutical packaging and delivery systems, is fully valued based on its historic P/E multiples. WST stock has rallied from $129 to $233 off the recent bottom compared to the S&P which moved 40%, with the resumption of economic activities as lockdowns are gradually lifted. WST stock is also up 140% from levels seen in late 2017, a little over two years ago.

WST stock has not only fully recovered back to the level it was at before the drop in February, due to the coronavirus outbreak becoming a pandemic, it is now up 33% from those pre-crisis levels. This seems to make it fully valued, despite the company’s business of pharmaceutical packaging seeing increased demand in the current pandemic.

The fundamental performance of the company was robust with 15% top-line growth, and roughly 1% change in Net Margins resulting in Non-GAAP EPS growth of 17% between 2017 and 2019. The 140% rise of the last 2 years is primarily being led by P/E multiple expansion, which surged over 100% from 35x in 2017 to 72x now (trailing Non-GAAP earnings). Much of this expansion came in this year, due to an increased demand for its drugs packaging solutions. However, we believe the stock is unlikely to see any significant upside after the recent rally. Our conclusion stems from the comparison of the current P/E to levels seen in the past years, P/E of 35x at the end of 2017 and 2018, and 46x as recent as late 2019. Our dashboard, ‘What Factors Drove 140% Change in West Pharmaceutical Stock between 2017 and now?‘, has the underlying numbers.

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So what’s driving WST stock higher and can it hold on to its gains?

The global spread of coronavirus has resulted in higher demand for pharmaceuticals packaging and delivery systems, something West specializes in. It has tied up with Schott AG to offer glass containment options along with West’s existing Ready Pack system. The company also posted a steady Q1 with sales growth of 11% and earnings growth of 36% on a per share and adjusted basis, primarily due to expansion of Net Margins. While most businesses are expected to take a hit on revenues and earnings in 2020 due to the impact of the pandemic, West is poised to see steady revenue and earnings growth. The current full year 2020 consensus average earnings estimate of $3.61 for West reflects 11% y-o-y growth.

However, much of these factors are likely already priced in the company’s current stock price. While West’s full-year 2020 results will see steady growth, investors will focus their attention on 2021 results and beyond – and the continued growth in demand for drugs packaging will likely help WST stock to hold on to the gains it has seen over the recent weeks, but a further rally in the stock appears to be unlikely, in our view. At the current price of $233, WST stock is trading at 64x its average consensus forward earnings, and the valuation appears to be much higher when compared to the multiple of 35x and 46x seen over the recent years.

While West Pharmaceutical Services stock looks like it is fully valued, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

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