A 320% gain makes the Halma (LSE:HLMA) share price one of the FTSE 100’s better performers over the last decade. £1,000 invested in the stock in 2014 would have a market value of £420 today.
The company’s success has been its ability to grow by acquiring other businesses. And the latest trading update on Thursday (26 September) indicates that things are still going well in this regard.
Trading update
Overall, the market viewed Halma’s latest report positively, sending the stock up on the news. And there were clear reasons for optimism.
The company reported growing revenues and widening profit margins. Importantly, management also stated that the last six months have gone well in terms of acquisitions.
Halma spent around £85m during the first six months of its financial year. In doing so, it added four businesses to its network of safety products.
According to management, the outlook is also positive on this front. So investors can expect the firm to keep making deals and expanding its portfolio over the rest of the year.
Growth by acquisition
Attempting to grow by making acquisitions is intrinsically risky. If management anticipates returns that don’t materialise, a company can be left with nothing but debt to pay off.
There are a couple of reasons for thinking that Halma has this risk pretty well under control though. One is the firm has a long history of successfully acquiring businesses.
Another is the size of business the company focuses on. These are typically small compared to the overall business, meaning the consequences of a mistake are limited.
The largest acquisition outlined in the latest report cost Halma £44m. Even if that turns out badly, the effect is likely to be small in the context of a firm generating £2bn in revenues.
Valuation
With any investment – whether it’s stocks or solar panels – an obvious question to ask is how long it will take to pay for itself. And Halma seems expensive from this perspective.
A price-to-earnings P/E ratio of 37 suggests a long wait before the company makes enough in profits to repay an investment at today’s prices. But things aren’t quite so straightforward.
Obviously, Halma’s anticipated earnings growth should help reduce this time considerably. But there’s another point worth noting.
The shares traded at a P/E ratio of 37 back in 2019. And investors who bought the stock back then and held it since would have outperformed the FTSE 100 as a whole.
Should I buy the shares?
I think investors who buy Halma shares have a decent chance of doing well over the long term. It’s a quality business and I expect it to keep growing for some time.
Despite this, I’m not looking to buy the stock right now, simply because I think there are even better opportunities at the moment. And those are where I’m focusing my attention.
Halma is a business I’ve been following for some time and that’s not going to change. When I think the time is right, I’ll be ready to add it to my portfolio.
