As the owner of famous brands from Sensodyne to Panadol, Haleon (LSE: HLN) strikes me as a possible candidate for my portfolio. Unique brands can give a company pricing power – and I reckon Haleon owns some good ones. So, could buying Haleon shares now be a potential long-term bargain buy for my portfolio?
Profit growth potential
It is still fairly recently that the business was carved out of GSK, so I think it is hard to assess its finances.
Last year, post-tax profits were £1.1bn. That compares to a current market capitalisation of almost £30bn. But I think we will need to see several years’ worth of figures as an independent listed company to get a feel for the long-term trends in Haleon’s financial performance.
What is clear is that it has an impressive stable of consumer goods brands. Such brands can give a company what is known as pricing power. So as some shoppers will prefer to buy a Panadol tablet specifically rather than a supermarket’s own-label equivalent, they are willing to pay a higher price. That can help profits and fend off competition.
Another thing I like about the brand portfolio is that is caters, literally, to buyers’ pain points. From sore teeth to a headache, Haleon products can help people combat an ailment that is causing them discomfort. I think shoppers are willing to spend on such brands, even when money is tight.
That brand portfolio and global reach mean Haleon should have solid long-term profit growth prospects, in my opinion.
Modest performer
Enough about customer pain, what about possible shareholder pain?
After all, GSK has been a poor long-term performer, with the shares falling 18% over the past five years. Haleon shares have been trading just under a year, during which time they have gone up by 2%. That is better than falling, but it is not a stellar start to life as an independent listed company.
One risk I see is cost inflation eating into profit margins. With a complex global supply chain, Haleon has had to deal with prices rising on everything from ingredients to labour costs.
Large job cuts announced this week might help trim costs, but could also damage staff morale. As a long-term investor, that concerns me. A demoralised workforce can be bad for business.
First-quarter sales performance was strong across all geographies and most product categories. But Haleon is still a young company and I think it needs to prove it can grow its business on a sustained basis.
Valuing Haleon shares
That lack of track record makes Haleon shares hard to value.
The company saw costs last year related to breaking off from GSK that ought to fall away from this year onwards. Still, using last year’s earnings, the shares trade on a price-to-earnings ratio of 26, which does not look cheap to me.
If those costs fall and profits grow, for example due to the cost-cutting, Haleon shares could yet turn out to be a bargain.
Whether management can successfully achieve substantial profit growth remains to be seen. So for now, I like the business but do not see it as a bargain. I will not be adding it to my portfolio.
