When stock prices are falling, the best mindset to have is a long term one. High quality stocks such as West Pharmaceutical Services, Inc. has fared well over time in a fickle stock market, which is why I want to bring it into light amongst all the chaos. Below I take a look at three key features of what makes a robust defensive stock investment: its size, financial health and track record.
West Pharmaceutical Services, Inc. manufactures and sells containment and delivery systems for injectable drugs and healthcare products in the United States, Germany, France, Other European countries, South Korea, and internationally. Started in 1923, and run by CEO Eric Green, the company size now stands at 7.65k people and with the company’s market capitalisation at US$11b, we can put it in the large-cap category. Generally, large-cap stocks are well-resourced and well-established meaning that a bear market will cause it to rejig some short-term capital allocations, but stock market volatility is hardly detrimental to its financial health and business operations. Therefore large-cap stocks are a safe bet to buy more of when the wider market is going down and down.
With US$196m debt on its books, West Pharmaceutical Services has to pay interest periodically. This means it needs to have enough cash on hand to meet these upcoming expenses. With an interest coverage ratio of 46.54x, West Pharmaceutical Services produces sufficient earnings (EBIT) to cover its interest payments. Anything above 3x is considered safe practice. Moreover, its cash flows from operations copiously covers it debt by 160%, which is higher than the bare minimum requirement of 20%. Its cash and short-term investment is also sufficient to cover other upcoming liabilities, which means WST is financially robust in the face of a volatile market.
WST’s annual earnings growth rate has been positive over the last five years, with an average rate of 14%, beating the market growth rate of 13%. It has also returned an ROE of 16% recently, above the industry return of 9.8%. Characteristics I value in a long term investment are proven in West Pharmaceutical Services, and I can continue to sleep easy at night with the stock as part of my portfolio.
Next Steps:Whether you’re convinced or not, the key takeaway here is that every stock gets hit in a bear market, but not every stock deserves the blow. When prices are dropping like flies, now is the time to do your research and buy at a discount. West Pharmaceutical Services tick the boxes in terms of its scale, financial health and proven track record, but there are a few other things I have yet to consider. Below I’ve compiled a list of factors for you to continue your reading before you buy:
- Future Outlook: What are well-informed industry analysts predicting for WST’s future growth? Take a look at our free research report of analyst consensus for WST’s outlook.
- Valuation: What is WST worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether WST is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.
If you spot an error that warrants correction, please contact the editor at firstname.lastname@example.org. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.