Animal medicine provider Dechra Pharmaceuticals (LSE: DPH) made an impressive statement in its trading update today. The company now expects “stronger than expected trading performance” for its full financial year that ended on June 30.
In itself, the statement is positive enough. But what I found truly impressive was that this update comes just a little over a month after its last one. It expects revenue growth of 21% in the past year, with robust growth in both Europe and North America. This performance follows consistent revenue increases over the past few years.
Robust share price rise, but pricey too
It is little surprise then, that the FTSE 250 stock has seen an impressive increase over the years. In the past five years, it has shown a 284% increase in share price. In the past year alone its share price is up over 57%. And today, its share price is up another 1% after its update.
Much as I would like to buy this unstoppable stock now, I am hesitant after looking at its price-to-earnings (P/E) ratio, which is at a whole 111 times right now. It is likely that it will decline once detailed earnings numbers for the full year become available. Its forward P/E is estimated to be 40 times, which is significantly lower than it is now. However, in comparison to many other high potential FTSE 100 and FTSE 250 stocks, it is still quite high.
What’s next for Dechra Pharmaceuticals
I can still justify buying the share at an elevated P/E if it has great growth prospects. I am not sure that will be the case next year, compared to the robust trend seen this year. The past year was particularly good for Dechra Pharmaceuticals as people have spent more time with their pets in the lockdown. As a result, the company points out, they could have become more aware of their healthcare needs. It is also possible that pet ownership has increased in its target markets. In the UK alone, 3.2m households have acquired a pet in the last 16 months.
Now, however, there is already anecdotal evidence of people returning their pandemic pets to shelters. This indicates that the next year may not be as positive.
What I would do now about the FTSE 250 stock
Keeping this in mind, I am willing to wait longer before making a decision on buying the stock. It releases its results in September, which will answer two questions for me.
One, what its outlook is for the next year. A continued positive outlook would build the case to buy it. In any case the medium to long-term outlook for the pet industry is decent. But knowing that it will continue to grow even after the pandemic spurt, will give me greater confidence in the stock. And two, what its P/E looks like after the earnings update. This will tell me how expensive it is compared to other stocks for a fact.
For now, it is a wait and watch for me.
