Is West Pharmaceutical Services Stock a Smart Investment?
February 25, 2021 at 09:34 AM EST
Medical delivery systems provider West Pharmaceuticals (WST) has retreated slightly over the past month on news of flexibility in the temperature regulations needed to optimize the efficacy of Pfizer’s (PFE) COVID-19 vaccine. However, with a nationwide vaccination program that is now kicking into second gear, optimal transportation and logistics systems will be a necessity. As such, we think WST should rebound in no time. This expectation makes its current price levels a solid entry point for investors seeking to go long in the stock.
Medical packaging, containment and delivery systems developer West Pharmaceutical Services, Inc. (WST) has leveraged its unique logistics system and business channels to remain operational amid the COVID-19 pandemic. As a result, the stock has appreciated 67.1% over the past year. Investors have been bullish on the stock over the past couple of months given the company’s role in COVID-19 vaccine distribution through its diverse packaging and vial containment solutions. WST has gained 4.2% over the past three months because FDA approved vaccines so far require strict storage temperatures to be effective.
However, a February 19 submission by Pfizer, Inc. (PFE) to the FDA regarding its COVID-19 vaccine has raised concerns about the demand for WST’s distribution services for the vaccine. PFE’s data demonstrates that the vaccine can remain stable when stored for up to two weeks in pharmaceutical freezers and refrigerators. This revelation caused WST to decline. The stock has lost 7.1% over the past month.
While the FDA has yet to approve PFE’s request, we believe the following factors will drive WST’s performance in the near term:
Even though PFE’s vaccine has demonstrated resilience in slightly higher temperatures than previously recommended, transporting the vaccines from production facilities to different states requires proper packaging and delivery systems. While Moderna’s vaccine can be stored at relatively higher temperatures compared to PFE’s updated storage requirements, mass distribution from its New Hampshire facility demands third-party services. Thus, WST is expected to play a critical role in the nationwide vaccination drive.
Moreover, with the pandemic promoting the use of telehealth services, foot traffic at traditional clinics has reduced significantly. Drug delivery kiosks and standalone platforms have been gaining popularity in the transforming healthcare industry. This is because people seem to prefer time-saving online consultations and drug delivery platforms to waiting in long queues at clinics. Consequently, the drug delivery technology market is expected to grow at a CAGR of 7.7% over the next seven years to hit a market valuation of $8.33 trillion.
WST has an impressive growth history and high profitability. The company’s revenues have increased at a CAGR of 10.3% over the past three years, while its EBIT has risen at a CAGR of 19% over this period. Its net income and EPS have grown at CAGRs of 32% and 31.9%, respectively, over the past three years.
The company has generated $2.15 billion in revenues over the past year, and $767.80 as gross profit. Its trailing 12-month EBITDA margin and leveraged free cash flow margins of 23.79% and 10.16%, respectively, compare favorably with the respective industry averages. In addition, WST’s net income margin and ROE of 16.13% and 21.03% are significantly higher than the respective negative industry averages.
Consensus Ratings and Price Target Indicate Potential Upside
Analysts expect WST to hit $328 soon, indicating a potential upside of 19.6%. The stock has an average broker rating of 1.5, which indicates a favorable analyst sentiment. Of six Wall Street analysts that rated the stock, two rated it Strong Buy and two rated it Buy.
POWR Ratings Show Promise
WST has an overall rating of B, which equates to Buy in our proprietary POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors with the weighting of each optimized to improve overall performance.
WST also has a B grade for Growth, Sentiment, Momentum and Quality. This is justified, given the company’s robust price gains and financial performance. Analysts expect a further increase in WST’s financials this year, driven by global vaccine deployment plans. The company’s EPS is expected to increase 41.6% in the current quarter (ending March 2021), 29.2% in fiscal 2021, and at a rate of 22.6% per annum over the next five years. Consensus revenue estimates represent a 24.4% rise year-over-year in the current quarter, and 18.4% rise in the current year.
Of the 182 companies in the Medical – Devices & Equipment industry, WST is currently ranked #35. In addition to the grades I’ve highlighted, you can check out other ratings for Value and Stability here.
There are 32 other stocks in this industry with an overall rating of A or B. Click here to see them.
We think WST’s slight price decline over the past month provides a perfect entry point for investors to profit from current industry trends. With coronavirus vaccine distribution expected to be critical until at least the end of the first half of the year, WST should reach new highs soon.
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WST shares were trading at $277.96 per share on Thursday afternoon, down $0.96 (-0.34%). Year-to-date, WST has declined -1.83%, versus a 3.23% rise in the benchmark S&P 500 index during the same period.
About the Author: Aditi Ganguly
Aditi is an experienced content developer and financial writer who is passionate about helping investors understand the do’s and don'ts of investing. She has a keen interest in the stock market and has a fundamental approach when analyzing equities.Is West Pharmaceutical Services Stock a Smart Investment? appeared first on StockNews.com