Are these expensive FTSE 100 stocks actually brilliant bargains?

Paul Summers takes a closer look at two FTSE 100 stocks that could recover strongly in time, despite already carrying high price tags.

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Can a stock be highly valued and yet still offer great potential? As counterintuitive as it sounds, I think this could be the case for at least a couple of companies in the FTSE 100.

Profits slump

By most measures, chemicals firm Croda International (LSE: CRDA) is having a pretty awful time. The share price is down over 30% in the last 12 months. That’s a huge lag to the admittedly still-not-very-good 3% fall achieved by the UK’s top index.

The reason for this is weaker than expected trading. Back in October 2023, the firm guided to lower adjusted profit before tax of £300m-£320m due to clients cutting back on ingredient inventories as a result of lower demand in the aftermath of the pandemic.

As it turns out, the final figure came in today (27 February) at just under £309m.

A 33% drop from the previous year is undoubtedly troubling. And yet the shares still change hands for 30 times forecast FY24 earnings.

Where’s the bull case here?

Long-term winner

Croda’s problems strike me as temporary. Indeed, management expects trading to “accelerate” from next year, supported by technology megatrends that push a “continued transition to sustainable ingredients and biologics“. If true, recent performance will be remembered as the product of earnings volatility that all companies inevitably experience.

It’s also worth pointing out that Croda has a brilliant, multi-decade record of increasing its dividends every year. You don’t manage that without doing something consistently right and boasting a solid balance sheet. No wonder the share price has climbed from under £3 to almost £47 in 20 years. Back in December 2021, the shares even surpassed £100.

I suspect many investors will steer clear until sales begin to improve. But this is definitely on my watchlist as a potential contrarian buy.

Another laggard

A second stock that looks initially pricey but I reckon could still be worth owning for the long haul is life-saving tech firm Halma (LSE: HLMA).

Again, here we have another example of a highly respected business whose share price has recently struggled. The stock has been trading within a fairly tight range for the last couple of years after growth companies rapidly lost their shine with investors.

Despite this, I’d still need to stump up 29 times earnings for a stake.

Dividend demon

Again, the vital thing to realise is that some stocks are highly valued because they’ve earned a great reputation for delivering the goods.

Halma is no exception. Like Croda, it blows the FTSE 100 out of the water on a longer timeline. Go back two decades and the shares were a little over £1. Today, the very same stock changes hands for more than £23.

The result is even better when dividends are factored in. These have been hiked by 5% or more every year for 44 years!

Sadly, past performance doesn’t predict future returns. And now that the company is worth around £9bn, it’s not going to multi-bag overnight.

But I can’t see the demand falling for technology that protects workers and the environment as well as patients’ quality of life.

It may not be a ‘bargain’ but I’d buy today as part of a diversified portfolio if I had the cash to do so.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Croda International Plc and Halma Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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