The healthcare sector can be a good spot for long-term investors. The beauty of this sector is that it offers both growth and defence. Here, I’m going to take a look at one of the London Stock Exchange‘s largest healthcare stocks, Haleon (LSE: HLN). Are the shares worth buying today?
A lot to like
At first glance, there’s a lot to like about Haleon from an investment perspective.
For starters, it owns many powerful brands (Voltaren, Advil, Sensodyne, etc). Strong brands are a competitive advantage as they create customer loyalty.
Secondly, the company is generating healthy growth. Last week, Haleon told investors that for 2022, it generated revenue growth of 13.8% (organic growth of 9%). Adjusted operating profit was also up 13.8% (5.9% at constant currency). Looking ahead, the group said it expects FY2023 organic revenue growth of 4-6%.
It’s worth noting these results show the company’s ‘defensive’ side. It’s still generating growth in a relatively challenging economic environment.
Additionally, the valuation doesn’t seem overly demanding. Currently, Haleon shares trade on a forward-looking price-to-earnings (P/E) ratio of about 17. That’s higher than the UK market average. However, it’s not particularly high for a consumer healthcare company with a portfolio of strong brands. Rival Reckitt, which owns brands such as Nurofen, Strepsils, and Durex, also trades on a P/E ratio of around 17.
I’ll point out that several brokers have price targets that are well above the current share price. Credit Suisse, for example, has a target of 376p (this may be revised after the recent full-year results).
Two key risks
Having said all that, there are a couple of risks to be aware of here. One is debt. At the end of 2022, net debt was £9.9bn. That’s quite high. And some of this debt (about 13%) is ‘floating’, which means Haleon is vulnerable to higher interest rates.
This debt pile could become a bit of an issue. If rates keep rising, interest payments are going to rise, eating into profits. This could impact the company’s ability to pay dividends, as well as its share price.
Another issue is the fact that both GSK and Pfizer – who still own a ton of Haleon shares – plan to sell their holdings at some stage. The lock-up period ended in November, so I’d expect to see some selling activity soon.
This could potentially add downward pressure to the share price and limit gains in the near term.
My take on Haleon
Putting this all together, my view is Haleon’s worth taking a look right now. In the long run, I think it could turn out to be a solid investment.
However, given the debt pile and the uncertainty over share sales from GSK and Pfizer, I don’t see it as a ‘screaming buy’ right now.
In other words, there are other shares I’d buy before Haleon.
