High quality Halma is being overlooked

Those who follow our research will know that we have an unapologetic focus on quality.

It is our belief that investing in predominantly high quality stocks is an effective way to make long-term returns in the market.

By ‘high quality’ we mean companies that have a proven track record of delivering profitable growth, that generate high levels of cash, and that maintain strong balance sheets so they don’t need to dilute shareholders.

A great example of a high quality stock is safety equipment maker, Halma (HLMA).

Halma have a five year average Return on Equity of 18.1% (CAGR/Avg), double-digit profit margins and an “exceptionally strong” order book.  

And whilst the FTSE 100 index nears record highs, Halma’s share price remains more than 30% below the £32 mark it hit last January.

Recession-proof revenue

Halma is a global conglomerate of around 45 companies which provide innovative products and services designed to save lives, protect the environment and improve quality of life.

The majority of Halma’s products are key to their customer’s fixed operations, meaning demand is almost recession-proof.  

The group operates across three broad market areas:

1. Safety:

In the Half-Year (HY22) to end November 2022, this sector delivered revenue of £355m, up 11% on the same period in 2021 of which 10% was organic in nature. Profits in this sector edged 3% higher to £75m during the same period.  

2. Environment:

This sector saw HY22 revenue surge 26% to £264m and profit increased by a similar percentage to £65m.

3. Healthcare:

This sector delivered revenue growth of 23% to £257m (HY22) of which 9% was organic. Profitability was also strong at £56m (HY22), up 22%.

Strong and sustainable growth

For a conglomerate, Halma has a stunning track record of delivering profitable growth.

Of course, this quality does not come cheap. Halma trade on a forward earnings multiple of 26.9, which is one of the highest valuations in the sector and market.

However, with all three of Halma’s sectors posting robust levels of revenue and profit growth in the half year, we believe Halma’s recession-proof growth story is worthy of its premium valuation.

Hammering out a bottom

There’s no getting away from it, Halma’s share price has considerably underperformed during the last year.

The market isn’t stupid and key reasons behind this underperformance include; Halma having to hold more stock due to the global supply crisis and reduced short-term sentiment towards defensive stocks as the Chinese economy reduces Covid restrictions.

And, having formed a new swing low at the turn of the year, the technical timing looks compelling. Combine this with Halma’s high-quality financials and we believe there is a strong case to put Halma in your portfolio.