By far the biggest riser in the FTSE 250 at the end of last week was Dechra Pharmaceuticals (LSE:DPH). On Friday alone the share price jumped by 33%, to close at 3,704p. Yet given the reason behind the surge, I don’t see any real value in long-term investors buying the UK stock. Here’s why I’ve got that conviction.
Fading pandemic momentum
Before we get into the jump, it’s important for investors to understand what position Dechra is in. The company develops and make veterinary products, ranging from aesthetics to nutritional products.
The business has been operating for many years and it performed very well during much of 2020 and 2021. The pandemic meant that we all spent more time at home with our pets. So the general demand for Dechra products increased over this period.
This has fallen off as we’ve emerged on the other side of the pandemic. In fact, in the half-year earnings report in February, operating profit dropped by 27.2% versus the same period in its prior year. It also warned that full-year operating profit would be at the lower end of current expectations.
Given the performance over the past few months, it wasn’t surprising that the stock was down 38% over the past year (before the move on Friday).
An offer in the works
The reason for the jump was news breaking of discussions of a buyout from private equity firm EQT Partners. Whenever chatter of an offer comes through, one of the key points for investors is what the offer price would work out to be. In this case, it’s 4,070p.
Historically, when this sort of news comes out, we see a jump in the stock close to where the offer price is set. It won’t usually hit the exact price because there’s always some uncertainty about whether a deal will go through.
This was the case for the stock on Friday, as it jumped to 3,700p, not a million miles away from 4,070p. The difference in price makes sense, as EQT Partners has until the second week of May to put a firm offer on the table. Developments over the coming weeks should help dictate if an agreement going to be successful.
Why I’m not interested in buying
Without the talk of an offer, I wouldn’t be bothered at all about buying Dechra Pharmaceuticals shares based on the current financial outlook. So to consider buying now would simply be due to the offer. Yet at 3,700p, the best case is a 10% move higher to the likely offer price. On the other hand, if the whole thing falls through, there’s significant risk of a sharp move lower (maybe 30%-40%).
This kind of risk/reward ratio just isn’t something I feel smart investors should be contemplating. It’s a short-term coin toss rather than a long-term fundamentally driven investment choice. As a result, I think this is a story that investors should keep an eye on, but nothing more.
