West Pharmaceutical Services (WST)

Healthcare products company West Pharmaceutical Services (NYSE:WST) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, but sales were flat year on year at $698 million. The company’s full-year revenue guidance of $2.96 billion at the midpoint came in 2% above analysts’ estimates. Its non-GAAP profit of $1.45 per share was 18.1% above analysts’ consensus estimates.

Company Overview

Founded in 1923 and serving as a critical link in the pharmaceutical supply chain, West Pharmaceutical Services (NYSE:WST) manufactures specialized packaging, containment systems, and delivery devices for injectable drugs and healthcare products.

Companies specializing in drug development inputs and services play a crucial role in the pharmaceutical and biotechnology value chain. Essential support for drug discovery, preclinical testing, and manufacturing means stable demand, as pharmaceutical companies often outsource non-core functions with medium to long-term contracts. However, the business model faces high capital requirements, customer concentration, and vulnerability to shifts in biopharma R&D budgets or regulatory frameworks. Looking ahead, the industry will likely enjoy tailwinds such as increasing investment in biologics, cell and gene therapies, and advancements in precision medicine, which drive demand for sophisticated tools and services. There is a growing trend of outsourcing in drug development for nimbleness and cost efficiency, which benefits the industry. On the flip side, potential headwinds include pricing pressures as efforts to contain healthcare costs are always top of mind. An evolving regulatory backdrop could also slow innovation or client activity.

West Pharmaceutical Services competes with companies like Becton, Dickinson and Company (NYSE:BDX), Gerresheimer AG (ETR:GXI), Stevanato Group (NYSE:STVN), and Aptar Pharma, a division of AptarGroup (NYSE:ATR), in the pharmaceutical packaging and drug delivery systems market.

Larger companies benefit from economies of scale, where fixed costs like infrastructure, technology, and administration are spread over a higher volume of goods or services, reducing the cost per unit. Scale can also lead to bargaining power with suppliers, greater brand recognition, and more investment firepower. A virtuous cycle can ensue if a scaled company plays its cards right.

With $2.90 billion in revenue over the past 12 months, West Pharmaceutical Services has decent scale. This is important as it gives the company more leverage in a heavily regulated, competitive environment that is complex and resource-intensive.

A company’s long-term performance is an indicator of its overall quality. Even a bad business can shine for one or two quarters, but a top-tier one grows for years. Over the last five years, West Pharmaceutical Services grew its sales at a decent 8.9% compounded annual growth rate. Its growth was slightly above the average healthcare company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within healthcare, a half-decade historical view may miss recent innovations or disruptive industry trends. West Pharmaceutical Services’s recent performance shows its demand has slowed as its revenue was flat over the last two years.

This quarter, West Pharmaceutical Services’s $698 million of revenue was flat year on year but beat Wall Street’s estimates by 2%.

Looking ahead, sell-side analysts expect revenue to grow 1.7% over the next 12 months, similar to its two-year rate. While this projection suggests its newer products and services will fuel better top-line performance, it is still below average for the sector.

Operating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses – everything from the cost of goods sold to advertising and wages. It’s also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.

West Pharmaceutical Services has been an efficient company over the last five years. It was one of the more profitable businesses in the healthcare sector, boasting an average operating margin of 22.7%.

Looking at the trend in its profitability, West Pharmaceutical Services’s operating margin decreased by 2.1 percentage points over the last five years. This performance was caused by more recent speed bumps as the company’s margin fell by 5.1 percentage points on a two-year basis. We’re disappointed in these results because it shows its expenses were rising and it couldn’t pass those costs onto its customers.

This quarter, West Pharmaceutical Services generated an operating profit margin of 15.3%, down 2.3 percentage points year on year. This contraction shows it was less efficient because its expenses increased relative to its revenue.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

West Pharmaceutical Services’s EPS grew at a spectacular 13.6% compounded annual growth rate over the last five years, higher than its 8.9% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t expand.

We can take a deeper look into West Pharmaceutical Services’s earnings quality to better understand the drivers of its performance. A five-year view shows that West Pharmaceutical Services has repurchased its stock, shrinking its share count by 3.3%. This tells us its EPS outperformed its revenue not because of increased operational efficiency but financial engineering, as buybacks boost per share earnings.

In Q1, West Pharmaceutical Services reported EPS at $1.45, down from $1.56 in the same quarter last year. Despite falling year on year, this print easily cleared analysts’ estimates. Over the next 12 months, Wall Street expects West Pharmaceutical Services’s full-year EPS of $6.64 to shrink by 4.6%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

West Pharmaceutical Services has shown impressive cash profitability, giving it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 12.9% over the last five years, better than the broader healthcare sector.

Taking a step back, we can see that West Pharmaceutical Services’s margin dropped by 2.6 percentage points during that time. Continued declines could signal it is in the middle of an investment cycle.

West Pharmaceutical Services’s free cash flow clocked in at $58.1 million in Q1, equivalent to a 8.3% margin. This result was good as its margin was 4.4 percentage points higher than in the same quarter last year, but we wouldn’t put too much weight on the short term because investment needs can be seasonal, causing temporary swings. Long-term trends carry greater meaning.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although West Pharmaceutical Services hasn’t been the highest-quality company lately, it found a few growth initiatives in the past that worked out wonderfully. Its five-year average ROIC was 26.9%, splendid for a healthcare business.

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.

Companies with more cash than debt have lower bankruptcy risk.

West Pharmaceutical Services is a profitable, well-capitalized company with $404.2 million of cash and $202.6 million of debt on its balance sheet. This $201.6 million net cash position gives it the freedom to borrow money, return capital to shareholders, or invest in growth initiatives. Leverage is not an issue here.

We enjoyed seeing West Pharmaceutical Services beat analysts’ revenue and EPS expectations this quarter. We were also glad it lifted its full-year revenue and EPS guidance. Overall, we think this was a solid "beat-and-raise" quarter. The stock traded up 5.9% to $230.42 immediately after reporting.

Updated: July 10, 2025 at 11:58 PM EDT

A common mistake we notice when investors are deciding whether to buy a stock or not is that they simply look at the latest earnings results. Business quality and valuation matter more, so we urge you to understand these dynamics as well.

West Pharmaceutical Services’s business quality ultimately falls short of our standards. Although its revenue growth was decent over the last five years, it’s expected to deteriorate over the next 12 months and its diminishing returns show management's prior bets haven't worked out.

West Pharmaceutical Services’s P/E ratio based on the next 12 months is 35.8x. This valuation tells us a lot of optimism is priced in - we think other companies feature superior fundamentals at the moment.

Wall Street analysts have a consensus one-year price target of $278.84 on the company (compared to the current share price of $230.14).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.