Dividend Aristocrats In Focus: West Pharmaceutical Services

Since marginal costs for many healthcare and medtech industry companies are not overly high, revenue increases usually go hand in hand with some margin expansion. This was true for West Pharmaceutical Services, which managed to grow its earnings-per-share by an outstanding 46% during Q3 on a year over year basis.

Growth Prospects

The whole healthcare industry will benefit from ongoing macro trends such as an aging population and increasing numbers of new therapies that seek to treat all kinds of ailments. As a result, West Pharmaceutical Services will likely continue to see ongoing growth from its core businesses, manufacturing, and parts production.

Management believes that West Pharmaceutical Services will be able to grow its revenues by 6% to 8% a year in the long run, on an organic basis, excluding the impact of mergers and acquisitions. West Pharmaceutical’s growth rate was a little lower than that over the last decade, but factoring in the very encouraging growth in recent quarters, it looks like the company has found a way to improve its growth potential. We estimate a high-single-digit sales growth rate can be achieved in the long run.

The compelling growth that was experienced in 2020 can be attributed to a strong performance of West Pharmaceutical Services’ proprietary product segment, which grew by more than 15% year over year. The company’s HVP (high-value products) segment grew by more than 20% year over year in 2020. Contract manufacturing also was a segment with above-average growth during the last year.

Going forward, West Pharmaceutical Services’ proprietary product portfolio could help the company in improving its organic sales growth rate in the long run. We thus believe that management’s guidance of a 6%-8% annual sales growth rate seems achievable, although there is of course, no guarantee that the company will hit that target.

Source: West Pharmaceutical Services presentation

The above slide shows that the gross margins across West Pharmaceutical Services’ business units differ quite a lot. Contract manufacturing, for example, is a rather low-margin business, although it should be noted that the company does not have a lot of risks and R&D expenses in that segment.

Other business units, however, such as the HVP components business, come with significantly higher margins. The growth of these segments could easily lift company-wide margins over the coming years, which is why it would not be a surprise to see net profits grow at a somewhat steeper rate than the company’s revenues.

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