West Pharmaceutical Services’s 34.6% return over the past six months has outpaced the S&P 500 by 20.2%, and its stock price has climbed to $284.57 per share. This was partly thanks to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy West Pharmaceutical Services, or should you be careful about including it in your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free for active Edge members.
Why Is West Pharmaceutical Services Not Exciting?
Despite the momentum, we're cautious about West Pharmaceutical Services. Here are three reasons you should be careful with WST and a stock we'd rather own.
1. Lackluster Revenue Growth
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 annualized revenue growth of 1.5% over the last two years was below its five-year trend. 
2. Shrinking Adjusted Operating Margin
Adjusted operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D. It also removes various one-time costs to paint a better picture of normalized profits.
Looking at the trend in its profitability, West Pharmaceutical Services’s adjusted operating margin decreased by 5.5 percentage points over the last five 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 20.3%.
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. Unfortunately, West Pharmaceutical Services’s ROIC has decreased significantly over the last few years. 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. With its shares outperforming the market lately, the stock trades at 36.6× forward P/E (or $284.57 per share). This valuation tells us a lot of optimism is priced in - we think there are better opportunities elsewhere. We’d recommend looking at our favorite semiconductor picks and shovels play.
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