West Pharmaceutical Services has gotten torched over the last six months - since October 2024, its stock price has dropped 29.3% to $202.47 per share. This was partly driven by its softer quarterly results and may have investors wondering how to approach the situation.

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Even with the cheaper entry price, we don't have much confidence in West Pharmaceutical Services. Here are three reasons why there are better opportunities than WST and a stock we'd rather own.

Why Is West Pharmaceutical Services Not Exciting?

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.

1. Revenue Growth Flatlining

We at StockStory place the most emphasis on long-term growth, but within healthcare, a stretched 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.

2. Shrinking Adjusted Operating Margin

Adjusted operating margin is one of the best measures of profitability because it tells us how much money a company takes home after subtracting all core expenses, like marketing and R&D. It also removes various one-time costs to paint a better picture of normalized profits.

Looking at the trend in its profitability, West Pharmaceutical Services’s adjusted operating margin decreased by 6.6 percentage points over the last two years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its adjusted operating margin for the trailing 12 months was 19.8%.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

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. Over the last few years, West Pharmaceutical Services’s ROIC has unfortunately decreased. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.