What a brutal six months it’s been for West Pharmaceutical Services. The stock has dropped 34.8% and now trades at $211, rattling many shareholders. This may have investors wondering how to approach the situation.
Is there a buying opportunity in West Pharmaceutical Services, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Why Is West Pharmaceutical Services Not Exciting?
Despite the more favorable entry price, we don't have much confidence in West Pharmaceutical Services. Here are three reasons why there are better opportunities than WST and a stock we'd rather own.
1. Revenue Growth Flatlining
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 revenue was flat over the last two years. 
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.
Looking at the trend in its profitability, West Pharmaceutical Services’s adjusted operating margin decreased by 5.7 percentage points over the last two 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 19.8%.
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. Over the last few years, West Pharmaceutical Services’s ROIC has unfortunately decreased significantly. 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. Following the recent decline, the stock trades at 33× forward P/E (or $211 per share). This multiple tells us a lot of good news is priced in - you can find better investment opportunities elsewhere. We’d recommend looking at one of Charlie Munger’s all-time favorite businesses.
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