Is There A Better Pick Over West Pharmaceutical Services Stock?

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Is There A Better Pick Over West Pharmaceutical Services Stock?

Is There A Better Pick Over West Pharmaceutical Services Stock?


We believe that Catalent stock (NYSE: CTLT), a global solutions provider for drugs, biologics, gene therapies, and consumer healthcare products, currently is an attractive pick over West Pharmaceutical Services (NYSE: WST), best known for injectable pharmaceutical packaging and delivery systems, given its comparatively lower valuation and better prospects. CTLT stock trades at 3.8x trailing revenues, compared to 9.6x for WST stock. We believe that this valuation gap is justified to some extent, given West Pharmaceutical’s superior revenue growth and better profitability. While both companies have seen a substantial rise in revenues since the lockdowns started being lifted, West has fared better marginally over recent quarters, led by a high demand for its Covid-19 related products.

Looking at stock returns, WST, with -19% returns over the last six months, has fared better than CTLT, which is down 28%. This compares with a 4% fall in the broader S&P500 index. However, there is more to the comparison, and we believe Catalent stands out with higher expected returns than West Pharmaceutical Services, as discussed in the sections below.  We compare a slew of factors such as historical revenue growth, returns, and valuation multiple in an interactive dashboard analysis – Catalent vs. West Pharmaceutical ServicesWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. West Pharmaceutical Services’ Revenue Growth Over The Recent Years Has Been Stronger

  • Both companies managed to see sales growth over the recent quarters. Still, West Pharmaceutical Services has witnessed comparatively faster revenue growth of 32% over the last twelve months versus 29% for Catalent.
  • Looking at a longer time frame, Catalent’s sales grew at a CAGR of 18.1% to $4.5 billion over the last twelve-month period, compared to $2.5 billion in 2018, while West Pharmaceutical Services’ sales rose at a CAGR of 18.6% to $2.8 billion from $1.7 billion over the same period.
  • For Catalent, the revenue growth was primarily driven by robust demand for its Biologics offerings, including drug product and drug substance offerings related to Covid-19. The acquisitions of Skeletal in November 2020 and Delphi and Acorda in February 2021 have buoyed the revenue growth over the recent quarters.
  • West Pharmaceuticals Services saw its sales expand for its proprietary products, including Westar and NovaPure, along with solid demand for its products related to the Covid-19 vaccine and treatments.
  • Our Catalent Revenue and West Pharmaceuticals Services Revenue dashboards provide more details on the companies’ revenues.
  • Looking forward, we believe Catalent will see superior revenue growth, led by its Biologics business. The table below summarizes our revenue expectation for both the companies over the next three years and points to a CAGR of 10.2% for Catalent, compared to a CAGR of 7.0% for West Pharmaceutical Services.
  • Note that we have different methodologies for companies negatively impacted by Covid and for companies not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to predict recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.

2. West Pharmaceutical Services Is More Profitable, And It Comes With Lower Risk

  • West Pharmaceutical Services’ operating margin of 26% over the last twelve-month period is better than 18% for Catalent.
  • This compares with 17% and 6% figures seen in 2019, before the pandemic, respectively.
  • Our Catalent Operating Income and West Pharmaceutical Services Operating Income dashboards have more details.
  • Looking at financial risk, West Pharmaceutical Services beats Catalent. Its <1% debt as a percentage of equity is much lower than 24% for Catalent. Also, its 23% cash as a percentage of assets is higher than 9% for Catalent, implying that WST has a better debt position and better cash cushion.

3. The Net of It All

  • We see that the revenue growth and profitability have been better for West Pharmaceuticals Services, and it also offers comparatively a lower financial risk. However, Catalent is trading at a much lower valuation than WST stock.
  • Looking at prospects, using P/S as a base due to high fluctuations in P/E and P/EBIT, we find CTLT stock to be a better bet of the two.
  • The table below summarizes our revenue and return expectation for CTLT and WST over the next three years and points to an expected return of 29% for CTLT over this period vs. just a 5% expected return for WST stock, implying that investors are better off buying CTLT over WST, based on Trefis Machine Learning analysis – Catalent vs. West Pharmaceutical Services – which also provides more details on how we arrive at these numbers.

 West pharmaceutical Services vs. Applied Materials.

What if you’re looking for a more balanced portfolio instead? Here’s a high-quality portfolio that’s beaten the market consistently since the end of 2016.

Returns Mar 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
CTLT Return -3% -23% 266%
WST Return -4% -21% 339%
S&P 500 Return -2% -10% 91%
Trefis MS Portfolio Return -3% -13% 244%

[1] Month-to-date and year-to-date as of 3/10/2022
[2] Cumulative total returns since the end of 2016

Trefis 
Market-Beating Portfolios
Trefis 
Price Estimates

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


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