For many investors, owning shares of Dechra Pharmaceuticals (LSE: DPH) has been highly rewarding. They have grown 23% in a year and now trade 146% higher than they did five years ago. But lately, the Dechra Pharmaceuticals share price has been falling and it is now down 16% since the start of 2022. Is this a buying opportunity for my portfolio?
Why I would consider buying Dechra Pharmaceuticals
Dechra is in the business of making animal supplements such as nutrition products, dog food, and veterinary pharmaceuticals. Its customer base includes farmers and pet owners. I think that is an attractive market to sell into. Both farmers and pet owners are motivated to nourish their animals. That means that they are typically willing to spend money on animal nutrition. As quality matters, price sensitivity is lower than it is in some markets. For a manufacturer like Dechra, that can translate into attractive profits. Last year, post-tax profits at the company surged 64%.
Demand is also likely to be fairly robust in mv view. No matter what is going on in the wider world or economy, animals need to be cared for and fed. So Dechra’s area of business will likely see fairly stable demand for the foreseeable future.
The company has built a portfolio of premium brands such as Vetoryl. That gives Dechra pricing power that should help it maintain profits over the long term. As the company grows, it could also benefit from economies of scale.
There are risks, of course. The barriers to entry in this area are not very high and a deep-pocketed competitor could take on Dechra, possibly hurting both revenues and profitability. On top of that, although the company helps improve animals’ immunity, Dechra itself is not immune to the impact of cost inflation. That could eat into its profit margins.
But my main concern about buying the stock for my portfolio currently is the Dechra Pharmaceuticals share price. It has crashed 23% since I wrote about my valuation concerns back in August. I think it could still fall further.
Even after the share price fall, it trades on a price-to-earnings ratio of 80. Although Dechra is a growth company with a proven business model in an attractive field, that valuation looks far too high for me. I do not like using adjusted earnings as I find them a less transparent accounting measure, but even using adjusted earnings the P/E ratio is still 37. That is much lower, but is more expensive than I would pay even for a high-quality growth company. Admittedly, it is in line with the P/E ratio of US rival Zoetis. But I think that just suggests possible overvaluation in the whole animal nutrition sector. That does not make Dechra’s price any more attractive to me.
My next move on the Dechra Pharmaceuticals share price
I like the Dechra business and would happily hold it in my portfolio. But, even after the share price has declined in recent months, I do not think the company trades on an attractive valuation. For that reason, I will not be buying it at the current price. Instead, I am waiting to see if it keeps falling far enough to make for an attractive valuation.
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Christopher Ruane has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.