West Pharmaceutical Services, Inc.'s (NYSE:WST) Shares Climb 25% But Its Business Is Yet to Catch Up

West Pharmaceutical Services, Inc. (NYSE:WST) shareholders have had their patience rewarded with a 25% share price jump in the last month. While recent buyers may be laughing, long-term holders might not be as pleased since the recent gain only brings the stock back to where it started a year ago.

After such a large jump in price, West Pharmaceutical Services may be sending very bearish signals at the moment with a price-to-earnings (or "P/E") ratio of 42.9x, since almost half of all companies in the United States have P/E ratios under 18x and even P/E's lower than 11x are not unusual. However, the P/E might be quite high for a reason and it requires further investigation to determine if it's justified.

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For instance, West Pharmaceutical Services' receding earnings in recent times would have to be some food for thought. It might be that many expect the company to still outplay most other companies over the coming period, which has kept the P/E from collapsing. You'd really hope so, otherwise you're paying a pretty hefty price for no particular reason.

See our latest analysis for West Pharmaceutical Services

Want the full picture on earnings, revenue and cash flow for the company? Then our free report on West Pharmaceutical Services will help you shine a light on its historical performance.

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 a frustrating 16% decrease to the company's bottom line. The last three years don't look nice either as the company has shrunk EPS by 29% in aggregate. So unfortunately, we have to acknowledge that the company has not done a great job of growing earnings over that time.

In contrast to the company, the rest of the market is expected to grow by 13% over the next year, which really puts the company's recent medium-term earnings decline into perspective.

With this information, we find it concerning that West Pharmaceutical Services is trading at a P/E higher than the market. It seems most investors are ignoring the recent poor growth rate and are hoping for a turnaround in the company's business prospects. There's a very good chance existing shareholders are setting themselves up for future disappointment if the P/E falls to levels more in line with the recent negative growth rates.

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

Shares in West Pharmaceutical Services have built up some good momentum lately, which has really inflated its P/E. Generally, our preference is to limit the use of the price-to-earnings ratio to establishing what the market thinks about the overall health of a company.

We've established that West Pharmaceutical Services currently trades on a much higher than expected P/E since its recent earnings have been in decline over the medium-term. When we see earnings heading backwards and underperforming the market forecasts, we suspect the share price is at risk of declining, sending the high P/E lower. Unless the recent medium-term conditions improve markedly, it's very challenging to accept these prices as being reasonable.

The company's balance sheet is another key area for risk analysis. You can assess many of the main risks through our free balance sheet analysis for West Pharmaceutical Services with six simple checks.

If you're unsure about the strength of West Pharmaceutical Services' business, why not explore our interactive list of stocks with solid business fundamentals for some other companies you may have missed.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.