Haleon (LSE:HLN) shares started trading on the LSE’s Main Market at 8:00am on Monday 18 July 2022, making the stock just over a year old. The stock displayed some volatility after launch, but if I had invested a year ago, today I’d be up around 8.8%.
Adding in the dividend yield, which for the first year sat at 0.73%, a £1,000 investment a year ago would be worth around £1,095 today. That’s a very positive return in what has been a very challenging market.
What is it?
Haleon was launched as an independent company separate from GSK last year, driven by several compelling reasons to establish the consumer healthcare brand as a distinct entity from the pharmaceutical giant. GSK was also able to cash in on the sale and reallocate debt to the new business with more reliable cash flows.
Haleon’s strong start is evident from its impressive financial highlights in the first quarter of 2023:
- Revenue: £2.9 billion, a significant 13.7% increase year-over-year
- Operating profit: £725 million, showing a remarkable 34% year-over-year growth
- Adjusted earnings per share: 22.4 pence, indicating a notable 32% year-on-year rise
These results align with its expectations and demonstrate the company’s commitment to achieving management’s objectives of organic growth of 4-6% annually over the medium term. Additionally, Haleon aims to achieve a return on capital of 15%, or higher, during the same period.
Reasons for strength
It may have overachieved in its first year of business as an independent entity. Especially given the challenges facings consumers during the cost-of-living crisis.
However, as we know, companies with strong brands tends to outperform in periods of economic weakness. These are defensive qualities that take a long time to replicate. Haleon has a world-leading portfolio that includes over 60 brands, notably Sensodyne, Panadol, Voltaren, Theraflu, and Centrum.
Additionally, the company’s strong global presence in over 100 countries has likely been beneficial, enabling it to capitalise on currency fluctuations and gain advantages from the pound’s weakness in international markets.
Where next?
The currency tailwind that has benefited Haleon may diminish in the near and medium terms, depending on the market’s balance between higher interest rates and overall macroeconomic health. Additionally, analysts anticipate increased competition in the consumer healthcare market, potentially exerting pressure on margins in the long run.
Currently trading at 17 times earnings, the forward price-to-earnings ratio appears higher, at around 25 times, as cost inflation is expected to impact earnings throughout the year. While the company has achieved adjusted earnings per share of 4.2p, it fell short of expectations, which stood at 5.24p. This may be reflective of future quarters.
Despite some possible near-term challenges, Haleon remains a highly attractive business, with a firm grip on the international consumer healthcare market. I already hold its shares and I’m considering adding more to my portfolio. Despite expectations of growing competition, I believe Haleon’s competitive advantage will pull through.
