What’s going on with the Dechra Pharmaceuticals share price?

The week has started disappointingly for shareholders Dechra Pharmaceuticals (LSE: DPH). The stock is down about 15% in Monday morning trading, as I write, meaning it has lost 36% of its value over the past year. Why is Dechra Pharmaceuticals’ share price down so much – and could now be the time to add the company to my portfolio?

How to calculate shares

Essentially, there are two elements to show the value of the price. The first is the objective financial outlook of the business. Over time it becomes clearer, but it is not clear because no one can predict the future.

The second element is how the investor assesses the prospect. That is more subjective. Bullish investors may think the company deserves a stock premium because of its strong growth prospects. Others may feel that the stock should be priced lower to reflect the perceived risk.

During the period when a company matures, there is often a more widespread agreement among investors about its prospects and therefore its value. As billionaire investor Warren Buffett said, in the short term the market is a voting machine, but in the long term it is a weighing machine.

Growing sick

I think this is what has happened in Dechra as matures.

The basic business looks attractive to me. This company operates in an area where I expect to see resilient demand, which is animal nutrition. Brands, technology and distribution networks provide competitive advantage that can be converted into pricing power.

It has been consistently profitable and last year made £58m after tax. Revenue increased by 12%. That’s very believable – but not the kind of huge growth rate associated with some early-stage companies.

However, for a long time Dechra has been trading at a sort of price-to-earnings ratio having a high growth business. I’m active investors reassessment of whether the value is worth it lies behind the price fall, instead of any dramatic step down in the value of the underlying business.

Interim results are disappointing

That said, today’s price action follows the release of the company’s interim results this morning. Year over year, operating profit fell 22%, diluted earnings per share fell 47% and operating cash flow before interest and taxes fell 36%. Net debt more than doubled to £423m. That all sounds terrible.

The company has changed to run its own sales and marketing operations in Korea. That drags down earnings. There are other risks to future earnings, such as cost inflation eroding profit margins. The operating margin in the period fell sharply, from 28.2% to 23.9%.

But I still think the results show some positive aspects of Dechra’s business. Revenue was up 13.5% compared to the same period last year, although helped by exchange rate movements. While operating profit fell, it was still at £44m. The next dividend payment on shares is 4.2%.

Stock price changes from tumbling

Previously, this company was valued for perfection. As the latest results show, business performance is far from perfect.

But even after half of where they started last year, I still think Dechra shares look pricy. They trade at more than 50 times last year’s earnings after tax – and today’s announcement makes me think that earnings may fall this year.

So even though the stock price is down, I’m not ready to buy it yet.