West Pharmaceutical Services Stock Shows Every Sign Of Being Significantly Overvalued
- By GF Value
The stock of West Pharmaceutical Services (NYSE:WST, 30-year Financials) is believed to be significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $284.77 per share and the market cap of $21 billion, West Pharmaceutical Services stock is estimated to be significantly overvalued. GF Value for West Pharmaceutical Services is shown in the chart below.
Because West Pharmaceutical Services is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 10.1% over the past three years and is estimated to grow 11.75% annually over the next three to five years.
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Since investing in companies with low financial strength could result in permanent capital loss, investors must carefully review a company's financial strength before deciding whether to buy shares. Looking at the cash-to-debt ratio and interest coverage can give a good initial perspective on the company's financial strength. West Pharmaceutical Services has a cash-to-debt ratio of 1.89, which ranks in the middle range of the companies in the industry of Medical Devices & Instruments. Based on this, GuruFocus ranks West Pharmaceutical Services's financial strength as 8 out of 10, suggesting strong balance sheet. This is the debt and cash of West Pharmaceutical Services over the past years:
It poses less risk to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A company with high profit margins is also typically a safer investment than one with low profit margins. West Pharmaceutical Services has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $2.1 billion and earnings of $4.58 a share. Its operating margin is 19.51%, which ranks better than 82% of the companies in the industry of Medical Devices & Instruments. Overall, GuruFocus ranks the profitability of West Pharmaceutical Services at 9 out of 10, which indicates strong profitability. This is the revenue and net income of West Pharmaceutical Services over the past years:
Growth is probably the most important factor in the valuation of a company. GuruFocus research has found that growth is closely correlated with the long term stock performance of a company. A faster growing company creates more value for shareholders, especially if the growth is profitable. The 3-year average annual revenue growth of West Pharmaceutical Services is 10.1%, which ranks in the middle range of the companies in the industry of Medical Devices & Instruments. The 3-year average EBITDA growth rate is 16.4%, which ranks in the middle range of the companies in the industry of Medical Devices & Instruments.
Another way to look at the profitability of a company is to compare its return on invested capital and the weighted cost of capital. Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, West Pharmaceutical Services's return on invested capital is 20.10, and its cost of capital is 7.34. The historical ROIC vs WACC comparison of West Pharmaceutical Services is shown below:
In conclusion, the stock of West Pharmaceutical Services (NYSE:WST, 30-year Financials) appears to be significantly overvalued. The company's financial condition is strong and its profitability is strong. Its growth ranks in the middle range of the companies in the industry of Medical Devices & Instruments. 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.
