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Analyst Blog

Shares of West Pharmaceutical Services, Inc. (WST - Snapshot Report) reached a new 52-week high of $54.60 on Monday, October 1, 2012. The closing price of this global provider of drug administration systems’ stock as of October 1, 2012 was $54.10, which represented a solid year-over-year return of 31.4%.

Growth Drivers

 A favorable mix of record second quarter results, raised 2012 earnings guidance, incremental shareholders return, product expansion and strategic penetration into high-growth markets — are the major contributors of growth for this stock.

With respect to earnings surprises, West Pharmaceuticals has either surpassed or met the Zacks Consensus Estimates in three of the last four quarters, with an average beat of 6.04%.

On August 2, 2012, West Pharmaceuticals reported record constant currency revenue growth of 11.3% to $324.8 million. Sales from the Pharmaceutical Packaging Systems segment soared 13.1% in terms of constant currency, led by favorable sales mix and higher selling prices. Pharmaceutical Delivery Systems segment (up 6.1% in constant currency) also contributed to revenue growth on the back of strong product sales and contract services.

Despite currency headwinds and lack of customer inventory visibility through the rest of 2012, robust first half results and accretion from convertible debt financing have led the company to revise its earnings guidance to the range $2.60—$2.70 from $2.50—$2.67.

In addition, West Pharmaceuticals recently announced a 1% increase in its quarterly cash dividend to 19 cents from the fourth quarter of 2012. This represents the company’s 19th consecutive annual dividend hike. We believe West Pharmaceuticals’ commitment to deliver incremental returns to shareholders along with reliable operating cash flow should support research and development (R&D) as well as capital spending.

Further, we are also impressed by the company’s initiatives to expand its products portfolio via innovative product launches and strategic alliances. West Pharmaceuticals recently launched its B.safe syringe safety system to meet the increasing market demand for safety systems.  

Moreover, in September 2012, the company inked an agreement with Janssen Biotech, Inc. to develop and manufacture a leading-edge self-injection, SelfDose. The collaboration will enable the company to enhance its existing portfolio of self-injection technology as SelfDose complements West’s ConfiDose and SmartDose injection technologies.

In addition, West Pharmaceuticals’ expanding global footprint and diversified customer base lends it a competitive edge in the injectable drug delivery market. Its strategy to penetrate emerging markets is a major growth driver. The company opened two new plants in China and India in an effort to meet the dynamic and burgeoning market demand, especially in the Asia-Pacific region. However, macroeconomic pressure across the globe remains a headwind.

Earnings Estimate Revision

The Zacks Consensus Estimate for 2012 increased approximately 0.7% to $2.67 per share over the last 60 days. The current estimate implies year-over-year growth of 14.70%.

For 2013, the Zacks Consensus Estimate rose by 2.1% over the same time frame to $2.91 per share, implying year-over-year growth of 8.98%.

Valuation

West Pharmaceuticals currently trades at a forward P/E of 20.24x, a 7.3% premium to the peer group average of 18.86x. The price-to-book ratio of 2.70x represents a 8.4% premium to the peer group average of 2.49x. The company’s strong fundamentals justify the premium valuation of the stock.

The company has a 12-month ROE of 14.3%, which is in line with the peer group average.

About the Company

Pennsylvania-based West Pharmaceuticals is a global leader in the provision of drug administration systems and components for packaging as well as delivery of injectable drugs and delivery system components across various industries. With a market cap of $1.84 billion and 6,300 full-time employees, the company operates from 50 locations across continents.

West Pharmaceutical, which competes with 3M Co. (MMM - Analyst Report) and Rexam plc. (REXMY) in certain niches, currently has a short-term Zacks #2 Rank (Buy rating).

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