Suppose I have £1,000 to invest. As a UK investor, I think Halma (LSE:HLMA) shares might be one of the best stocks for me to buy right now.
The stock trades at a high price-to-earnings (P/E) ratio of around 38. But I think this a case where it’s best to follow Warren Buffett’s principle of being willing to pay a fair price for a great company.
Valuation
Halma has a market cap of £9bn and generated £268m in free cash last year. For an investment to work, the company is going to have to grow substantially and relying on future growth can be risky.
Future growth is never guaranteed and if the business can’t maintain its current 10% annual growth rate, it won’t generate enough to pay investors a decent return. The share price is also likely to fall.
If Halma can keep growing at 10% per year, though, today’s share price will represent a P/E multiple of 12 based on 2034’s earnings. And that isn’t a particularly demanding multiple.
The question, then, is whether or not the business can keep going the way it has been for another 10 years. And I think the chances of this are high enough to make it something I should buy.
Business model
Halma is an industrial conglomerate that aims to grow by acquiring other businesses and integrating them into its existing operations. A good example is its purchase of AprioMed AB last year.
The business manufactures and distributes medical devices used for bone biopsies. Adding it to Halma’s existing cancer products should benefit both sides.
Access to Halma’s expertise and capital should allow AprioMed to grow in ways it wouldn’t otherwise have been able to. And Halma stands to benefit by expanding and improving its existing businesses.
The deal therefore looks promising for both sides. And this is just one of a number of acquisitions the company has been making recently in order to keep its growth momentum going.
Unique strengths
From an investment perspective, there are a few things that stand out about Halma over other FTSE 100 stocks. One is the nature of its subsidiaries.
The company focuses on acquiring businesses that have dominant positions in relatively small markets – AprioMed AB is a good example. That makes them difficult for competitors to disrupt.
Another is the firm’s low capital requirements, which allow it to keep its growth engine going. In 2023, Halma generated around £319m in operating income using only £223m in fixed assets.
This means the company only has to use around 15% of its cash to maintain its ongoing operations. The other 85% is available to fund future acquisitions and deliver returns to shareholders.
A quality long-term investment
At today’s prices, I could buy 23 Halma shares with £1,000 — and I’m planning on doing exactly that when the new ISA year starts. The high P/E ratio means I might have to be patient, but I can’t think of a better long-term investment opportunity at the moment.
The company has a strong track record of growing its business through intelligent acquisitions. And there doesn’t seem to be any sign of opportunities drying up in the near future.
