But a price snapshot can only ever tell part of the story. It is one I think holds a valuable lesson for investors whether or not they own these shares. That lesson is about the importance of valuation and not overpaying for shares even in an outstanding business.

Takeover offer

The reason the stock surged a couple of months ago was because Dechr revealed it was in takeover talks. Today the company announced that it has reached agreement on the terms of the takeover, which will proceed at a valuation of £38.75 per share.

At this point, a look at the share price chart may be helpful.

Clearly, investors who bought into the company earlier this year before the announcement will be quids in.

But what about others?

Many long-term shareholders are in for a tidy payday. But the offer price is significantly lower than the historical highs hit by the stock. As the chart above shows, some fairly recent buyers from the past several years will have paid much more for their shares than they will now receive for them.

Imagine I had bought at the very end of 2021, for example. The takeover price confirmed today is 27% below what I would have paid for shares back then.

No choice

A takeover like this being finalised means that shareholders effectively have no choice but to sell. Once the takeover is complete, the shares will be delisted from the London stock exchange.

Even if some holders think Dechra has a strong business and could do very well in future, they will no longer be able to be part of that.

Valuation lesson

That is an important lesson for all shareholders, in my view.

If a company has an outstanding business, then it makes sense that a falling share price could lead possible suitors to run their rule over it. They make take advantage of a share price fall to make a takeover offer.

Paying too much even for an excellent company can be a costly mistake.

Last February, I wrote: “Although Dechra is a growth company with a proven business model in an attractive field, (its current) valuation looks far too high for me.” The share price at that point was higher than the amount shareholders will receive following today’s takeover announcement.

Valuation always matters to an investor.

Even if, as a long-term investor, I think a great company will be able to grow into an oversized valuation in years to come, I could be wrong. A takeover might force me to sell my shares sooner, perhaps at below what I see as the company’s underlying value. Indeed, that is what happened to my Stagecoach shareholding last year.

Not paying enough attention to valuation when buying a share can be a costly mistake!

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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.

The post This UK stock jumped 33% on Friday, but I’m not touching it! appeared first on The Motley Fool UK.

As I write Friday morning, the shares are about 36% higher than they were at the start of the session.

Possible takeover

That news was about a possible cash offer to take over the firm. That would mean all Dechra shares would be bought by a potential acquirer, subject to agreement.

The possible offer comes from Swedish investment group EQT and the Abu Dhabi Investment Authority. It could be pitched at £40.70 per share. Dechra has said it would recommend such an offer, subject to terms and conditions.

However, the offer is well below the share price of just a couple of years ago, so I expect many Dechra shareholders will not welcome any such bid.

Where now for the share price?

Although the shares jumped this morning, they are trading around 7% lower than the possible offer price. There are a number of possible explanations for this.

The offer has not been formally made and therefore has not been agreed. EQT and its partner could walk away. Dechra may decide a deal cannot be struck on the right terms and so decline to recommend it.

If the takeover does go ahead, I expect the Dechra Pharmaceuticals share price to rise to roughly the offer level. That suggests there could be further upwards moves from the current price.

On top of that, I think there is the possibility another firm may decide to enter the fray now that Dechra is in play. It has a well-established business in an area with resilient demand and strong pricing power. Both financial investors and some of Dechra’s trade rivals are likely running their slide rules over the numbers right now.

I’m not buying

I have long liked the Dechra business and would consider buying its shares. But the reason I have not is because I feel they have been consistently overpriced. After today’s jump, they trade at a price-to-earnings ratio of over 100. That seems far too high to me.

A buyer might be able to strip out costs while adding manufacturing and distribution muscle. That could mean the current valuation could be attractive in a way that is not true for me as a private investor with a purely financial motivation.

But I do not buy shares just on the basis of a possible takeover bid. If I decided to add Dechra to my portfolio today, it would be as a long-term investor looking to buy into a high-quality business.

I think the current Dechra Pharmaceuticals share price remains unattractive. I will therefore not be buying, regardless of what further bid news may emerge.

The post Why is the Dechra Pharmaceuticals share price soaring? appeared first on The Motley Fool UK.

How to value shares

Essentially, there are two elements to share price valuation. The first is what a business’s financial prospects objectively are. Over time that becomes clearer, but it is never entirely obvious as nobody can predict the future.

The second element is how investors assess those prospects. That is more subjective. Bullish investors may think a company deserves a share premium because of its strong growth outlook. Others may feel the shares ought to be priced lower to reflect risks they perceive.

Over time as a company matures, there is often more widespread agreement among investors about its outlook and therefore its valuation. As billionaire investor Warren Buffett says, in the short term the market is a voting machine, but in the long term it is a weighing machine.

Growing pains

I think that is what has been happening at Dechra as it matures.

The underlying business looks attractive to me. The company operates in an area I expect to see resilient demand, namely animal nutrition. Its brands, technology and distribution network give it a competitive advantage that can be turned into pricing power.

It has been consistently profitable and last year earned £58m after tax. Revenues grew by 12%. That is very creditable — but it is not the sort of huge growth rate associated with some early-stage companies.

However, for a long time Dechra has traded on the sort of price-to-earnings ratio associated with high growth businesses. I think an ongoing investor reassessment of whether it deserves such a valuation lies behind the price fall, rather than any dramatic step down in the worth of the underlying business.

Disappointing interim results

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

The company has been changing to running its own sales and marketing operation in Korea. That dragged down earnings. There are other risks to future earnings, such as cost inflation hurting profit margins. The operating margin in the period fell heavily, from 28.2% to 23.9%.

But I still think the results demonstrate some of the positive aspects of Dechra’s business. Revenues were up 13.5% compared to the same period last year, albeit helped by exchange rate movements. While operating profit fell, it still came it at £44m. The dividend was increased 4.2%.

Tumbling share price

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

But even after halving from where they started last year, I still think Dechra shares look pricy. They trade for over 50 times last year’s earnings after tax – and today’s announcement makes me think earnings may well fall this year.

So despite the tumbling share price, I am not ready to buy yet.

The post What’s going on with the Dechra Pharmaceuticals share price? appeared first on The Motley Fool UK.

Fragile market confidence means the FTSE index remains stuck around the 7,000-point marker.

I didn’t dash for cover even as the spectre of a fresh stock market crash emerged. In fact I looked for UK shares to buy as most others panicked. Investing as others flee for cover could boost my chances of becoming a stock market millionaire.

Listening to Warren Buffett

A great many of these investors would have made a stinking great loss by frantically selling their shares for less than they bought them for. They’d have failed legendary investor Warren Buffett’s most important tests: “Rule Number One: Never Lose Money. Rule Number Two: Never Forget Rule Number One.”

Investors who manage to master their emotions and ignore the market noise can avoid these painful losses. But this isn’t the only advantage.

Those who hold their nerve can take advantage of market panic to possibly make a fortune.

Just one FTSE 100 bargain

Humans are herd animals. We’re hard-wired to follow what the broader pack is doing. What’s more, we find it hard not to be governed by emotion when things get tough.

This is a toxic combination when it comes to investing. And it’s why a wide range of quality FTSE 100 stocks have been frantically sold off in recent weeks.

Take Dechra Pharmaceuticals as an example. In early September it reported “strong organic growth” in the first half as sales of its animal medicines rocketed 14% and underlying operating profits grew 9%.

Dechra faces a threat from increased costs, sure. But with meat consumption rising and plenty of scope for earnings-boosting acquisitions, the future here remains extremely bright.

Yet its share price has crashed by almost a quarter over the past month. This is just one great dip opportunity that I, as a FTSE 100 investor, have a chance to exploit.

Making stock market millions

Buying on the dip is a strategy that has created an abundance of stock market millionaires over the years.

Research in March showed that the number of US millionaires surge to an all-time high of 14.6m in 2021. According to financial researcher Spectrum Group, this jump was driven predominantly by wealth generated from domestic stock markets that soared from the troughs struck at the height of the pandemic.

The S&P 500 and Nasdaq US indices recovered 27% and 21% respectively over the course of last year. Those who bought in at the bottom of the market were therefore handsomely rewarded.

Getting rich like ISA investors

This isn’t a modern phenomenon. It’s also not one that’s exclusive to US investors.

According to HM Revenues and Customs there are now more than 2,000 Stocks and Shares ISA millionaires in the UK.

A vast proportion of these wealthy individuals invested heavily when stock markets crashed around the time of the 2008 financial crisis. And they made their fortunes during the following years as corporate profits recovered and share prices rebounded.

History shows that share prices always recover strongly from periods of turbulence. Buying beaten-down FTSE 100 shares today could significantly boost an investor’s chance of making brilliant long-term wealth.

The post I’m buying FTSE 100 shares to try and become a stock market millionaire! appeared first on The Motley Fool UK.

Pharma for animals

As a quick introduction, Dechra is a pharmaceuticals business that provides treatments and products for animals. It uses biotechnology at the core of its operations to create and enhance its products. A lot of its work involves adapting treatments currently used by humans, for animal use.

So what’s happening with the shares currently? Well, as I write, they’re trading for 3,462p. At this time last year, the stock was trading for 5,231p, which is a 33% decline over a 12-month period. I believe the shares have dropped due to macroeconomic factors and a stock market correction caused by events in Ukraine. Many other FTSE 100 stocks have suffered a similar fate in recent months.

The bull and bear case

Let’s take a look at some of the bull and bear aspects of Dechra shares. I’ll start with some positives.

Firstly, I’m buoyed by the fact that pet ownership is increasing, especially here in the UK. Data compiled by the Pet Food Manufacturers Association, which runs a census each year, reported that cats and dogs especially are increasing in numbers. This is good news for Dechra, as ownership increasing means that demand for medical treatments should rise too. This could boost performance and returns.

Next, I can see that Dechra has a good track record of performance. I’m aware that past performance is no guarantee of the future. However, looking back, I can see it has grown revenue and gross profit for the past four years in a row.

Finally, Dechra shares would boost my passive income stream through dividend payments. The current dividend yield on offer is 1.2%. Although lower than the FTSE 100 average of 3%-4%, I would expect this to increase as the business grows. Dividends are never guaranteed, though.

So to the bear case. With pet ownership increasing, competition for pet pharmaceuticals has jumped too. In fact, Dechra itself pointed towards strong EU-based competitors that could affect its market share in a recent update, as well as performance and growth aspirations.

The other issue I have with Dechra is regulation, which is extremely tight in any pharmaceutical sector and can be changed quickly. This could affect it negatively if it were to impact a popular product line or a new drug in development. It could have a bad impact on performance and investor sentiment.

A FTSE 100 stock I’d buy

To summarise, there are positives and negatives when it comes to Dechra shares. I’ve decided I would add the shares to my holdings. This is because I’m buoyed by the burgeoning marketplace as well as the profile and presence of Dechra. Furthermore, the passive income opportunity and performance track record help my investment case.

The post This dividend-paying FTSE 100 stock is primed for huge growth! appeared first on The Motley Fool UK.

UK shares: Coca-Cola

Providing that ice-cool hit on a warm day, Coca-Cola is a recognisable drinks brand in every corner of the globe. Listed on the FTSE 100, Coca-Cola HBC (LSE:CCH) is a bottler operating mainly in Europe and Africa. It currently trades at 1,671p, down 26% in the past year.

I see strong growth in its historical results. Between the 2017 and 2021 calendar years, group revenue increased from €6.5bn to €7.1bn, while profit before tax grew from €564m to €734m. As a potential shareholder, I see this growth in both revenue and profit as strong and consistent.

What’s more, earnings per share (EPS) rose from ¢117 to ¢150. By my calculation, this means that this firm has a compound annual EPS growth rate of just over 5%. In addition, the 2021 calendar year operating expenses declined by 1.9%, year on year.

On the other hand, the business recently pulled its guidance for 2022, because of the ongoing situation in Ukraine. It has a production plant in Kyiv and its sales in Russia will likely be affected. While this is a short-term concern, I think it is now factored into the share price and should subside in the near future.  

Veterinary pharmaceuticals

Another great UK share is Dechra Pharmaceuticals (LSE:DPH), which specialises in veterinary pharmaceuticals and biotechnology. Operating globally, it has strong historical results like Coca-Cola HBC. It currently trades at 4,109p, up 21% in the past year.

For the years ending June, between 2017 and 2021, revenue nearly doubled to £608m. Also, profits before tax rose from £28.6m to £74m. 

In addition, EPS grew from 64.68p to 108.77p, resulting in a compound annual EPS growth rate of nearly 11%. As a potential investor, I’m happy to see this level of sustained growth. It should be noted that past performance is not necessarily indicative of future performance.

The company has stated, however, that it faces strong competition on a number of new products within the EU market.

For the six months to 31 December 2021, the firm lifted its interim dividend to 12p per share, up over 8% year on year. This caused investment bank Liberum to raise its price target from 4,000p to 4,020p.

Overall, both of these UK shares exhibit strong growth over time. Given the recent market sell-off, I think they’re both good additions to my long-term portfolio. I will be buying shares in both companies today.

The post 2 UK shares to buy during this market dip! appeared first on The Motley Fool UK.

I am looking for companies that have a solid competitive advantage. And I am searching for firms operating in markets that might not be disrupted by the current geopolitical uncertainty. 

With that in mind, here are two FTSE 100 stocks that have recently caught my attention. 

FTSE 100 shares to buy

Veterinary pharmaceuticals group Dechra Pharmaceuticals (LSE: DPH) is one of the UK’s premier blue-chip stocks. 

The company develops and sells pharmaceutical products for the animal industry around the world. This market is very competitive and highly regulated.

Overcoming these challenges are probably the biggest risks to the company’s growth. Nevertheless, the corporation has performed well over the past couple of years by investing heavily in new products and research and development. 

Net profit has grown at a compound annual rate of 34% over the past six years. Analysts are expecting this growth to continue. 

Two trends could drive the company’s sales over the next five to 10 years. Demand for veterinary pharmaceuticals is increasing as the global population is growing. On top of this, the world needs more food, and farming animals is one of the best ways to meet rising demand. Keeping these animals healthy is vital, and Dechra’s products will play an important role here. 

Considering these challenges, I think the FTSE 100 group has a bright future, no matter what happens in Eastern Europe. As such, I would be happy to buy the stock from my portfolio today. 

Market growth

Flutter Entertainment (LSE: FLTR) is one of the largest online sports betting and gaming companies in the world. 

A surge in consumers using its platforms during the pandemic helped the enterprise generate windfall profits in 2020. And management is using this money wisely. The additional cash is helping to fund the company’s expansion in the US, which has the potential to be a massive growth market for the firm. 

That said, the FTSE 100 enterprise is not the only business to recognise the potential of this market. This too is a highly competitive industry, and larger players are throwing money at capturing market share. Flutter needs to keep investing, or it could be left behind. This is the most significant risk the corporation faces today. 

Still, I think it is unlikely the company’s operations will be disrupted significantly by the ongoing political crisis.

As such, I think the FTSE 100 business looks cheap compared to its potential after the recent sell-off. As the enterprise continues to expand around the world, I think it should benefit from increasing awareness of its brands and more significant economies of scale. These should help push down costs and improve profit margins. 

The post 2 FTSE 100 shares I’d buy as stocks fall appeared first on The Motley Fool UK.

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.

Valuation concerns

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.

The post As the Dechra Pharmaceuticals share price falls, should I buy? appeared first on The Motley Fool UK.

Latest financials from Pets at Home this week illustrate how strongly spending on animal care is growing. The FTSE 250 firm claimed it was on course for “a record year of sales and profit growth” for the period to March. This particular spending phenomenon is a global one too.

It’s why researchers at Grand View Research predict the global veterinary medicine market will rise to be worth $30.8bn by 2028. That’s up a whopping $20bn from what it was valued at last year. This is good news for drugs manufacturers like Dechra, of course.

Expensive but exceptional

Dechra has a long track record of unbroken annual earnings growth. It’s a history that’s been helped by a long line of acquisitions to create a top-quality portfolio of animal drugs and boost its global footprint. City analysts are expecting this positive bottom-line trend to continue too. They expect profits to expand 5% and 9% in the financial years to June 2022 and 2023 respectively.

A word of warning however. At current prices, Dechra trades on a heavy forward price-to-earnings (P/E) ratio of 35 times. Such a high valuation could cause a sharp share price reversal if news flow surrounding the company starts to look a little squiffy. In the case of Dechra this could happen, for example, if it encounters trouble with developing a particular potentially-money-spinning drug.

It’s my opinion though that Dechra’s long-standing record of constant profits growth makes it worthy of a handsome rating. And, perhaps more importantly, so does its robust position in a fast-growing market and the company’s lasting appetite for profits-bolstering acquisitions.

Another FTSE 100 share to buy

That said, I also love the thought of loading up on bargains. And that means Ashtead Group (LSE: AHT) remains high on my list. Like Dechra, a robust appetite for acquisitions helped profits at this FTSE 100 share rise consistently in recent years. And while Covid-19 has caused some temporary turbulence, the rental equipment business is expected to storm back straight away.

City analysts think earnings at Ashtead will rise 41% and 18% in the years to April 2022 and 2023 respectively. This leaves the business trading on a rock-bottom price-to-earnings growth (PEG) ratio of 0.5.

Acquisition activity in the past decade has also made Ashtead an industry giant in the US. The company has the balance sheet strength to continue splashing out on acquisition targets as well continuing to deliver monster shareholder returns.

I’d buy more Ashtead stock for my portfolio even though worsening economic conditions in the US could hit demand for its services. In recent days, the IMF has slashed its GDP growth forecasts for the US to 4% for 2022, from 5.2%. But I think the potential rewards here far outweigh the near-term risks.

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