West Pharmaceutical Services

Pick-and-shovel seller & Dividend Aristocrat

Whoever has a solution to a big problem will be able to make a lot of money with it. I've read this sentence in pretty much every company biography. But let me adapt this sentence to our current situation: whoever has an effective coronavirus vaccine will make good money with it. If, as a shareholder, you bet early on the Mainz-based vaccine maker BioNTech, that undoubtedly turned out to be true. Curevac shareholders, on the other hand, unfortunately weren't so lucky. Anyone who's been following my blog for a while knows that I really like so-called pick-and-shovel sellers. Why expose yourself to the risk of whether a vaccine works when you can also profit from a supplier?

The American company West Pharmaceutical Services is a world-leading manufacturer of high-quality packaging components for injectable drugs. So today let's take a closer look at this pharma supplier.

The history and business model of West Pharmaceutical Services Inc.

The origins of today's West Pharmaceutical Services Inc. go back to 1893, when Herman O. West was born in Minnesota. When he was young his father left the family, and from then on his mother had to take care of him and his siblings on her own. Herman was a good student, eager to learn. But unfortunately the family lacked money, which is why after graduating from high school he had to work for two years as a shipping clerk at a small lumber company to earn the money he needed for college. Once he had saved enough, he moved to Pennsylvania and attended university there. At the age of 25 he signed up for military service with the Navy, but fortunately World War I ended shortly afterwards. After his studies Herman started working as an accountant at a dental supply company, but more and more he warmed to the idea of founding his own dental supply company.

On July 27, 1923, the time had come, and together with his colleague Frank Mancill and his two former fellow students Jesse R. Wike and Norman F. Wiss, Herman founded his own company named The West Company. They set up their first production facility in a small house at 1117 Shackamaxon Street in Philadelphia and soon began making rubber grinding and polishing wheels, which they then sold to dentists in the region. Demand was extraordinarily high and the business developed excellently. That's why they didn't hesitate long and, within a few years, expanded the product range with other pharmaceutical rubber components such as plungers, stoppers and pipette bulbs. When the Scottish physician and bacteriologist Alexander Fleming discovered the effective antibiotic penicillin by a lucky accident in September 1928, it revolutionized the world of medicine. Shortly afterwards the company was asked by the pharmaceutical group Eli Lilly to develop a new kind of rubber closure for injectable drugs that could be pierced multiple times while still preserving sterility inside the container and not introducing any contaminants. It was exactly this rubber stopper that earned the West Company its good reputation throughout the entire pharmaceutical industry.

In the following years it began building more production sites, equipped among other things with larger and more efficient rubber presses. For example, a new press could cut the rubber parts automatically, eliminating time-consuming manual work. That alone allowed it to increase its production capacity considerably. While 200 million rubber parts were produced in 1947, by 1965 over 2 billion were already leaving the plant every year. In 1970 The West Company went public and used the fresh investment money to keep growing and push the development of new products. It also ventured into other business areas, but that wasn't always crowned with success. Since the 1990s it has been focusing on its core competence again, renamed itself West Pharmaceutical Services Inc. and today is one of the world's leading providers of packaging for injectable drugs, manufacturing of disposable medical devices and analytical services.

How could West Pharmaceutical Services develop in the future?

Let's first take a look at the most recently published quarterly figures (Q1 2021 - ended March 31, 2021). It probably won't surprise anyone that the coronavirus pandemic is fueling a pharma supplier's business. But even knowing that, the following numbers are extremely impressive. Net sales rose from $491.5 million in Q1 2020 to $670.7 million now; in other words, that's an impressive increase of 36.5 percent. But that's not all: adjusted earnings for the period January to March 2021 came in at $179.2 million, an incredible 103 percent above the prior-year result. Accordingly, adjusted earnings per share also a bit more than doubled, from $1.01 to $2.05.

I strongly assume that the situation will normalize again at some point and that revenue will sink back to a healthy level for the time being. But if you look at the stock apart from the coronavirus effects, you'll find that it's still an absolute quality company. So in the long run you probably can't go far wrong with shares of West Pharmaceutical Services Inc. The crème de la crème of the pharmaceutical industry are among its customers, new patents are filed continuously and every now and then it buys up suitable companies.

What about the dividend?

Shareholders of West Pharmaceutical Services have been receiving a share of the company's profits in the form of dividends since 1972. Since then the dividend has been paid every quarter, but not raised every year. Most recently, from 1990 to 1992, the dividend was left unchanged at $0.10. Since 1993 the medical supplier has managed to raise its payout every year, which is why it can now call itself a Dividend Aristocrat. Over the last 10 years the average dividend growth rate is a solid 7.3 percent. At just under 0.2 percent, however, the current dividend yield is already very low, even though the payout ratio of just 12 percent shows a lot of potential for future increases.

Conclusion:
I find the pharma packager's business model very interesting. Personally, I think the stock is a bit too expensive at the moment, but I'll still put West Pharmaceutical Services on my watchlist and maybe buy in later.