Animal nutrition specialist Dechra Pharmaceuticals (LSE: DPH) has been giving both animals and its own shareholders something to chew on lately. The Dechra Pharmaceutical share price has crashed 24% so far this month.
Could this present a buying opportunity for my portfolio?
Long-term growth prospects
The recent price tumble comes after a strong run for the company’s shares. Indeed they are still up 9% on the past year. Over five years, Dechra has been even more rewarding – the shares have gone up 180%.
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That reflects the fact that the company has seen strong growth and operates in a financially attractive industry. Animal nutrition is potentially very profitable, because both farmers and pet owners want to ensure the health of their animals. Revenues tend to be resilient, as animal medical needs remain the same no matter the state of the economy.
Last year, Dechra saw revenues increase 18%. Earnings per share improved even more, jumping 56%. Not only do those results speak to the strength of Dechra’s business model, I reckon it still has a long growth runway ahead of it. For the first half of its current year, the company increased revenues by 15%, excluding currency impacts. This month it updated the market and said its full-year outlook is in line with the upper end of management expectations.
All of that is very positive and at the right price, I would definitely consider buying Dechra for my portfolio. Right now, though, I am steering clear of it. Here is why.
Dechra Pharmaceuticals share price and valuation
A good business does not always make for a rewarding share. For example, investor enthusiasm for a company can push a share price up to a level where the valuation is excessive.
I think Dechra is an example of that right now. After the big jump I mentioned, post-tax profits came in at £56m. Earning more than a million pounds a week from animal supplements shows the business is in rude health. But the market capitalisation – the combined value of its shares – currently stands at £4.4bn. That means that Dechra’s price-to-earnings ratio is 79. I regard that as very high. Even allowing for the prospect of strong earnings growth in coming years I still feel the shares are expensive.
Pricing in risks
On top of that, such earnings growth is not guaranteed. The recent headline revenue growth of 15% excluding currency impact in fact only came to 10% when actual exchange rates were included. Double-digit sales growth is still impressive. But the difference between the two figures is a reminder that exchange rate fluctuations can hurt both revenues and earnings at a company doing business internationally like Dechra.
The company faces other risks to profits, too. In mature markets vets have increasingly been consolidating their practices into large chains. Such chains have strong buying power. That could damage profit margins for animal supplements.
I think this is a good business. At the right price I would be happy to buy its shares for my portfolio to hold for the long term. But I will not be buying at the current Dechra Pharmaceuticals share price.
