2023-06-14 04:21:48 ET
Summary
- Stevenato Group is a Pharmaceutical Manufacturing leader, generating 15% net income margins annually.
- The company has developed a global customer base over the course of its 70-year operating history and continues to add new clients with each passing quarter.
- The current valuation appears to be maxed out, but potential investors should add this high-quality company to their watchlists.
Introduction & Company Overview
Stevanato Group ( STVN ) provides packaging and drug delivery solutions to the pharmaceutical, biotechnology, and healthcare industries on a global scale. The organization specializes in the design, production, and distribution of primary glass packaging, drug delivery systems, and analytical services.
With a history dating back to 1949, Stevanato Group has become a global leader, serving customers all over the globe. The organization has three primary divisions:
Pharmaceutical Systems: This division specializes in glass primary packaging solutions, such as vials, cartridges, syringes, and ampoules. Stevanato Group provides a variety of specialized technologies, such as ready-to-use and sterile packaging, to ensure the safety and integrity of pharmaceutical products.
Drug Delivery Systems: Stevanato Group designs and manufactures cutting-edge drug delivery devices, including pen injectors, autoinjectors, and peripheral devices. These systems are intended to improve the patient experience and facilitate accurate and convenient medication administration.
Engineering Systems: This division offers an assortment of high-precision machinery and production lines for pharmaceutical and diagnostic applications. The engineering systems of STVN facilitate efficient and trustworthy manufacturing processes, such as glass forming, inspection, assembly, and packaging.
In addition to its primary product offerings, Stevanato Group provides its customers with analytical and testing services to ensure the quality and conformity of their products. The company is committed to technological innovation, utilizing its expertise in materials science, engineering, and pharmaceutical packaging to develop innovative solutions for the market.
STVN's global clientele consists of pharmaceutical companies, biotech companies, and healthcare organizations. By providing comprehensive packaging and drug delivery solutions, the company intends to contribute to the development of safe and effective therapies while addressing the industry's evolving requirements.
Strategic Investment Case and Competitive Advantages
With a history dating back to 1949, Stevanato Group possesses decades of experience in the pharmaceutical packaging industry. The company's extensive knowledge and expertise allow it to develop innovative and dependable solutions for its clients. The company leverages its unique know-how, developed over time, to build pharmaceutical, drug-delivery and engineering systems that allow clients to be more efficient and reach more of their own targeted customers.
STVN also offers integrated solutions that span the entire pharmaceutical packaging and drug delivery value chain. From primary packaging (vials, cartridges, etc.) to drug delivery systems (pen injectors, autoinjectors, etc.), the company offers a vast array of products and services, ensuring seamless compatibility and efficient manufacturing processes for its clients. Being a “1-stop shop” has helped Stevanato retain customers over the years.
STVN is committed to continuous technological innovation, investing in R&D to introduce innovative packaging and drug delivery solutions to market. By remaining on the cutting edge of industry trends and leveraging their expertise in materials science, engineering, and pharmaceutical packaging, they are able to develop cutting-edge products to meet their customers' evolving needs.
STVN places a meticulous emphasis on quality and compliance. Their products comply with stringent regulatory requirements, ensuring the integrity, safety, and efficacy of the drugs they contain. The company's dedication to quality is supported by rigorous testing and validation procedures and customers receive the benefit of knowing the company’s products will meet the approval of various regulatory bodies around the world. The rigorous commitment to quality is a significant value add for customers that can’t afford to deliver faulty or defective products.
The company's vertically integrated manufacturing capabilities are also a source of competitive advantage as it allows them to manage the entire production process, from glass conversion to assembly and packaging. This integrated strategy guarantees high-quality products, reduced lead times, and the flexibility to meet customer needs. By owning a significant portion of the manufacturing process, STVN can also produce its products more cheaply and pass along some of these savings to customers, creating a win-win situation.
These competitive advantages position Stevanato Group as a trusted partner and industry leader in providing the pharmaceutical and healthcare industries with packaging and drug delivery solutions.
Company & Investment Risks
Operating in the pharmaceutical industry comes with a unique set of risks and challenges. Compliance with evolving regulations and standards can be a challenge that STVN must consistently confront since the Pharma industry is a highly regulated sector. Stevanato Group must invest in maintaining compliance across all of its products and manufacturing processes in order to mitigate any potential legal and regulatory risks.
The success of Stevanato Group also depends on its ability to continue to develop and protect its intellectual property, such as patents, trademarks, and trade secrets. The possibility of intellectual property infringement or illicit use of their technology by rivals or third parties could compromise the company's competitive advantage.
Product Quality and Safety is a key risk area for STVN and the company must continue to consistently manage efforts in the space. Ensuring the utmost quality and safety standards for pharmaceutical products is essential. Deficiencies in quality control, such as defective packaging or compromised drug delivery systems, could damage the company's reputation and lead to regulatory actions, product recalls, or legal liabilities.
Stevanato Group's procurement of basic materials, components, and manufacturing equipment is another risk area as STVN relies on a complex global supply chain. Disruptions in the supply chain, such as shortages, logistical difficulties, or geopolitical issues, could impact the company's ability to deliver products on time and may result in higher costs or production delays.
Changes in Technology, rapid technological advancements and fluctuating market dynamics present both risks and opportunities. Stevanato Group must continually invest in R&D to remain ahead of emerging technologies and changing customer demands. Failure to adapt to shifting market trends and technological developments may result in a decline in market share.
Financial Overview
Although Stevanato came to the public markets in 2021, revenue growth has been strong over the past few years. In 2019, STVN reported revenue of $600M and in 2022 total revenue crossed the $1.0B threshold for the first time. YoY growth has been 34%, 19% and 10% over the past 3 years.
STVN is a company that has also demonstrated consistent profitability and improving margins. The chart below shows net income growth. Last year Net Income was $153M, representing a 14.5% margin. Since 2019, STVN net margin has more than doubled.
Management has executed these results by having a sharp focus on controlling operating expenses. As a percentage of revenue, SG&A expenses have declined from 14% in 2019 to 11% in 2022.
Another bonus is that the company does not appear to needlessly dilute its shareholders. Total diluted share counts have remained the 250M – 260M in recent years. Further enhancing shareholder return is that the company has paid an annual dividend to shareholders since going public. Admittedly, the dividend is currently small at $0.06 per share, but it’s another indicator of management’s shareholder-friendly style.
Turning to the balance sheet, STVN exhibits more trends in financial health. STVN has $275M of cash, long-term debt of $143M and total shareholder’s equity of $1.0B. Balance sheet indicators all point to STVN having the flexibility to continue to fund operations and growth.
Cash from operations has been positive and growing in recent years, though we would also note that free cash flow has been negative over the past 3 years as STVN has invested in capital purchases/equipment needed to fund growth. Over time, these purchases will slow and STVN will likely see significant improvements in FCF and net margins.
In the coming years, analyst consensus estimates appear to be reasonable and conservative. Revenue growth is projected to continue in the double digits with total sales hitting $1.3B in 2025. Net Margins are expected to hold steady over this time frame, remaining at 15%.
Overall, STVN checks all the boxes as a financially well managed company, that’s also positioned for moderate growth in the coming years.
Investment Outlook – Base, Bull & Bear Cases
In this writer’s view STVN scores strong as a company that has demonstrated its competitive advantages, successfully executed its growth plans and is operating in a financially health manner. Given this setup, the question is not whether STVN is a quality company, it’s whether STVN is investable at the moment.
Unfortunately for potential investors, the company currently trades at its highest P/E ratio since going public – a level of 45.0x forward earnings. With growth continuing, but also being projected to slow in the coming years, there doesn’t appear to be a strong case for multiple expansion at this point.
The bull case on STVN would center on the company continuing to land Pharma industry customers while also further leveraging its salesforce and vertical manufacturing capabilities to drive additional margin improvement. However, even if the company achieved 20% revenue growth next year and net margins expanded by 2.0% to 17% overall, STVN will still trade in the range of 35.0x earnings. This level does not exactly scream value.
The base case as reflected by the analyst estimates above also seems to indicate that there is little upside to the current valuation. Hitting 2023 and 2024 earnings targets will likely keep the P/E in the 40.0x range.
At the moment, there does not appear to be a major downside scenario for STVN and so the bear case likely centers on there being a global recession that impacts the company’s financials or management not being able to hit the company’s growth targets if the economy remains healthy. For the sake of modeling, we’ll assume a 20% hit to next year's earnings and a 30% drop in market cap. Here again, STVN still ends with a P/E of around 38.0x.
Considering the scenarios above, STVN is rated as a hold. There’s little doubt this is a quality, well-managed enterprise with growth opportunities to pursue. Unfortunately for potential investors, Mr. Market has placed a premium on STVN at the moment and there is no obvious entry point. It’s best to put STVN on the watchlist for now and wait for the P/E to hit less than 30.0x. Current valuations present little upside.
For further details see:
Stevanato Group: Undeniable Quality, But Lacking Upside