Is West Pharmaceutical Services Inc (WST) Fairly Valued?
The stock of West Pharmaceutical Services Inc (NYSE:WST) has seen a daily gain of 4.13% and a 3-month gain of 6.84%. With an Earnings Per Share (EPS) of 6.86, the question arises: Is the stock fairly valued? This article aims to answer this question by providing a comprehensive valuation analysis of West Pharmaceutical Services Inc. We invite you to read on for an in-depth exploration of the company's financial health and future prospects.
Company Overview
West Pharmaceutical Services is a Pennsylvania-based medical supplies company that operates as a key supplier to firms in the pharmaceutical, biotechnology, and generic drug industries. The company develops, manufactures, and distributes elastomer-based supplies for the containment and administration of injectable drugs. Its products range from basic equipment such as syringes, stoppers, and plungers, to more complicated devices including auto-injectors and other self-injection platforms.
The company reports in two segments: proprietary products (82% of 2021 sales) and contract-manufactured products (18%). It generates 55% of its revenue from international markets and 45% from the United States. With a stock price of $394.34 and a GF Value of $385.65, West Pharmaceutical Services (NYSE:WST) appears to be fairly valued.
Understanding GF Value
The GF Value is a proprietary measure that represents the current intrinsic value of a stock. It is derived from historical trading multiples, a GuruFocus adjustment factor based on past performance and growth, and future business performance estimates. The GF Value Line on our summary page gives an overview of the fair value at which the stock should ideally be traded.
Our analysis indicates that West Pharmaceutical Services (NYSE:WST) stock appears to be fairly valued. The stock's current price of $394.34 per share and a market cap of $29.10 billion align closely with our GF Value estimate. As such, the long-term return of its stock is likely to be close to the rate of its business growth.
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Financial Strength Analysis
Companies with poor financial strength offer investors a high risk of permanent capital loss. To avoid this, it's crucial to review a company's financial strength before deciding to purchase shares. The cash-to-debt ratio and interest coverage of a company are great ways to understand its financial strength. West Pharmaceutical Services has a cash-to-debt ratio of 2.56, which ranks better than 50% of companies in the Medical Devices & Instruments industry. The overall financial strength of West Pharmaceutical Services is 9 out of 10, indicating strong financial health.
Profitability and Growth
Profitable companies, especially those with consistent profitability over the long term, are generally less risky investments. West Pharmaceutical Services has been profitable for 10 of the past 10 years. Over the past twelve months, the company had a revenue of $2.90 billion and an Earnings Per Share (EPS) of $6.86. Its operating margin is 24.54%, which ranks better than 88.47% of companies in the Medical Devices & Instruments industry. The overall profitability of West Pharmaceutical Services is ranked 9 out of 10, indicating strong profitability.
One of the most important factors in the valuation of a company is growth. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of West Pharmaceutical Services is 16%, which ranks better than 70.4% of companies in the Medical Devices & Instruments industry. The 3-year average EBITDA growth is 25.8%, which ranks better than 71.55% of companies in the industry.
ROIC vs WACC
Another way to assess a company's profitability is to compare its return on invested capital (ROIC) and the weighted cost of capital (WACC). ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. Ideally, we want the ROIC to be higher than the WACC. For the past 12 months, West Pharmaceutical Services's ROIC is 24.16, and its WACC is 10.39.
Conclusion
In conclusion, the stock of West Pharmaceutical Services (NYSE:WST) gives every indication of being fairly valued. The company's financial condition is strong, and its profitability is robust. Its growth ranks better than 71.55% of companies in the Medical Devices & Instruments industry. To learn more about West Pharmaceutical Services stock, you can check out its 30-Year Financials here.
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This article first appeared on GuruFocus.
