Contract Manufacturer West Pharmaceutical Services Faces Challenging Outlook for 2024
Shares of contract manufacturer West Pharmaceutical Services dropped nearly 20% on Thursday morning as the company laid out a bleak projection for 2024. Known for producing components and devices utilized in the delivery of injectable medicines, West had previously cautioned that its clients were reducing their purchasing activities. However, as recently as October, the company had expressed optimism, anticipating a sales growth range of 7% to 9% for the year. Unfortunately, West now reveals that it anticipates a mere 2% to 3% increase in sales for 2024, indicating a deepening withdrawal by its clients.
In terms of financials, West projects adjusted diluted earnings of $7.50 to $7.75 per share in 2024, significantly below the FactSet consensus estimate of $8.77 per share. Furthermore, the company expects net sales between $3 billion and $3.1 billion, falling short of the $3.2 billion FactSet consensus estimate.
Jefferies analyst David Windley succinctly captured the impact of this news, exclaiming, "Ouch," in an early Thursday note.
Regarding the fourth quarter results, West reported revenue of $732 million, slightly lower than the $739 million consensus estimate. However, the company did surpass expectations for adjusted diluted earnings with $1.83 per share compared to the estimated $1.78.
In a press release issued earlier today, West highlighted robust organic sales growth in 2023, excluding pandemic-related sales. Nevertheless, the company anticipates "moderated organic sales growth" in 2024 due to inventory management timing, particularly with its largest customers.
While the company expresses confidence that business will improve after the first quarter of the year, investors remained unconvinced given the rapid shift in management's tone.
The Ongoing Impact of Inventory Management on West Corporation
Last year, executives at West Corporation expressed confidence that the effects of clients' "inventory management" would be temporary and limited to 2023. However, recent developments suggest that this issue is more serious and long-lasting than originally anticipated.
A note from William Blair analyst Matt Larew highlights the worsening and broadening of the destocking situation. Larew emphasizes the need for West to respond swiftly in order to establish clear timelines and communicate effectively that there will be no further cuts.
West executives previously attributed reduced client purchases to lower demand for vaccines post-pandemic, as well as clients gradually depleting their safety stock accumulated during the pandemic era. Quintin Lai, West's Vice President of Strategy and Investor Relations, explained on an investor call that clients were not reordering and instead consuming their safety stock.
This latest update raises concerns about the duration of these trends, the presence of any underlying issues in West's core business, and the management's understanding of demand.
According to Windley, an industry expert, management anticipates the first quarter of 2024 to face the greatest headwind from inventory management, with stronger sales growth expected in the second half of the year. However, Windley questions the visibility of West's demand projections at this stage.
As a result of this announcement, West shares have dropped by 17.7% in early trading. Before this news, the stock had experienced a 15.9% increase since the beginning of the year.
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