West Pharmaceutical Services, Inc.'s (NYSE:WST) Business Is Yet to Catch Up With Its Share Price

West Pharmaceutical Services, Inc. -4.17%

West Pharmaceutical Services, Inc.




When close to half the companies in the United States have price-to-earnings ratios (or "P/E's") below 17x, you may consider West Pharmaceutical Services, Inc. (NYSE:WST) as a stock to avoid entirely with its 48.8x P/E ratio. Nonetheless, we'd need to dig a little deeper to determine if there is a rational basis for the highly elevated P/E.

West Pharmaceutical Services certainly has been doing a good job lately as its earnings growth has been positive while most other companies have been seeing their earnings go backwards. It seems that many are expecting the company to continue defying the broader market adversity, which has increased investors’ willingness to pay up for the stock. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

Check out our latest analysis for West Pharmaceutical Services

NYSE:WST Price to Earnings Ratio vs Industry March 30th 2024
Keen to find out how analysts think West Pharmaceutical Services' future stacks up against the industry? In that case, our free report is a great place to start.

How Is West Pharmaceutical Services' Growth Trending?

There's an inherent assumption that a company should far outperform the market for P/E ratios like West Pharmaceutical Services' to be considered reasonable.

Retrospectively, the last year delivered virtually the same number to the company's bottom line as the year before. However, a few strong years before that means that it was still able to grow EPS by an impressive 73% in total over the last three years. Therefore, it's fair to say the earnings growth recently has been superb for the company.

Looking ahead now, EPS is anticipated to climb by 7.4% per annum during the coming three years according to the ten analysts following the company. Meanwhile, the rest of the market is forecast to expand by 10% per annum, which is noticeably more attractive.

With this information, we find it concerning that West Pharmaceutical Services is trading at a P/E higher than the market. Apparently many investors in the company are way more bullish than analysts indicate and aren't willing to let go of their stock at any price. Only the boldest would assume these prices are sustainable as this level of earnings growth is likely to weigh heavily on the share price eventually.

What We Can Learn From West Pharmaceutical Services' P/E?

Using the price-to-earnings ratio alone to determine if you should sell your stock isn't sensible, however it can be a practical guide to the company's future prospects.

We've established that West Pharmaceutical Services currently trades on a much higher than expected P/E since its forecast growth is lower than the wider market. Right now we are increasingly uncomfortable with the high P/E as the predicted future earnings aren't likely to support such positive sentiment for long. Unless these conditions improve markedly, it's very challenging to accept these prices as being reasonable.

A lot of potential risks can sit within a company's balance sheet. Our free balance sheet analysis for West Pharmaceutical Services with six simple checks will allow you to discover any risks that could be an issue.

If these risks are making you reconsider your opinion on West Pharmaceutical Services, explore our interactive list of high quality stocks to get an idea of what else is out there.

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