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FTSE 100 reshuffle: time to buy this hot growth stock?

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Image source: Getty Images

The quarterly FTSE 100 reshuffle is not far away. While two of the stocks likely to move into the top tier will come as no surprise (Morrisons and Meggitt are both risers that are subject to takeover bids), the third promoted stock is one some investors may never have heard of. Today, I’ll put that right by talking about Dechra Pharmaceuticals (LSE: DPH) — a global leader in developing, manufacturing, and selling products for veterinarians. 

Has Dechra been doing well?

You could say that. Thanks to a combination of manufacturing sites remaining operational during the pandemic and the explosion of pet ownership, this firm has been very busy indeed. As CEO Ian Page said recently, it’s clear “people have been spending more time with their pets and have therefore been more cognitive of their welfare”.

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All this has really boosted DPH’s top line. In July, the company said a “stronger than expected trading performance” had continued to the end of June. It now expects group revenue for the full year to come in 21% higher.

Pleasingly, a good amount of this growth was organic. However, the acquisitions of products such as ear infection gel Osurnia and weight gain drug Mirataz have also helped. The latter is already performing “ahead of expectations” following its launch. 

FTSE 100 beater

As one might expect, such robust trading has done the DPH share price no harm. Having climbed nearly 70% over the last 12 months, the company is currently valued at £5.7bn. In sharp contrast, the FTSE 100 has climbed ‘just’ 19% since August 2020. 

This difference in returns is even starker over the long term. Had I bought the stock five years ago, I would have trebled my money. The FTSE 100 is up a little less than 4% since 2016. In short, Dechra Pharmaceuticals is another example of how investing in a fairly concentrated group of individual stocks has the potential to deliver a far better return than the index.

Sky-high valuation

This is not to say there are no drawbacks to investing here.

The first relates to its valuation. Having done so well, the shares now look seriously expensive to acquire at 46 times earnings. For that price, I want to see a company generating things like sky-high returns on capital. That’s not the case here. Yes, pet ownership shows no signs of decreasing. And yes, the share price could also conceivably rise as FTSE 100-focused funds are forced to buy. However, I’m still not sure I’d be getting great value for money.

Despite being a regular dividend-hiker, DPH also wouldn’t be my first choice if I were looking to produce income from my investments. Based on a potential 41.1p per share return in the current financial year, the stock yields just 0.7%. That’s a lot less than that offered by some stocks in the top tier. Even the FTSE 100 index as a whole yields 3.4%.

I’d buy the (inevitable?) dip

As someone who’s hugely positive about companies operating in the petcare space, I’m not surprised by Dechra’s almost certain promotion to the FTSE 100. Then again, I can’t help but think that an awful lot of good news is priced in. So, this business stays on my watchlist for now. Should markets take a turn for the worse and good stocks fall alongside bad ones, I’ll be more likely to pull the trigger. 

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Meggitt and Morrisons. 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.

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