This trading update makes me think the Halma share price could be set to climb

Halma has been on a strong earnings growth spell for the past few years. The share price has lagged a bit of late, but that could change.

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The Halma (LSE: HLMA) share price is up 35% in the past five years, well ahead of the FTSE 100.

But it’s been a volatile ride. And right now, it’s down 30% from a 2022 peak.

Halma is in the safety technology business. It does hazard detection, alarms, and related products. And it looks like demand is growing well.

What now?

We should have full-year results in June. And today (14 March), we saw a trading update that sounded good.

Full-year guidance is unchanged from first-half results time. Back then, the firm said: “Our current expectation is for full-year 2024 adjusted profit before taxation to be in line with analyst consensus expectations.”

The key to me from this latest news is about acquisitions.

We heard: “Eight acquisitions have been completed in the year to date across the group’s three sectors, with £299m invested. We continue to have a healthy acquisition pipeline across all three sectors.

Growth risk?

Growth by acquisition can be a successful long-term strategy. But it brings its own special risks.

A company can easily overstretch itself. And we can see debt build up as buyouts happen. Then one day, in some sort of crisis, a firm can suddenly find itself in big trouble.

Remember what happened to some big-debt firms in the pandemic? We should never forget that lesson.

So, what does Halma’s debt situation look like?

Healthy balance sheet

At the interim stage on 30 September, the balance sheet showed nebt debt of £619m. That’s 24% more than a year previously. But I’d expect that in years when there are good takeover targets.

For a FTSE 100 company with a market cap of £8.6bn, and annual revenue around £2bn? I won’t say it’s small change. But I think it should be very manageable.

If it’s all going in line with broker forecasts, what does that mean? Time for some numbers.

What’s next?

In the past few years, Halma’s revenue has been growing at around 10% per year. Forecasts have that slowing a bit, to 7% this year and 6% next.

But they translate that into an 11% rise in earnings per share (EPS) for 2024, followed by 10% in 2025.

EPS dipped a bit in 2023, but it still gained 39% over the previous four years. It looks like the City expects at least more of the same.

We might think growth like this must come at a price. And the Halma stock valuation does seem a bit high.

What’s it worth?

We’re looking at a forecast price-to-earnings (P/E) ratio of 33 for this year. It should drop to 28 by 2026, which is still not low. But it’s been up in the high 30s, even hitting 44 in 2021.

I see valuation risk as well as acquisition and debt risk. This looks like a great company, but there’s a chance the market could see it as fully valued.

Still, for the right investors, I think Halma might be the best FTSE 100 growth stock to consider right now.

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.

Alan Oscroft has no position in any of the shares mentioned. The Motley Fool UK has recommended 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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