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This Terry Smith-owned FTSE 100 stock just surged 8%. Here’s what I’d do now

Yesterday, shares in health and safety specialist Halma (LSE: HLMA) – which is owned by top fund manager Terry Smith in his mid-cap-focused investment trust Smithson – jumped over 8%.

The reason the shares surged is that the FTSE 100 company, which describes itself as a “global group of life-saving technology companies,” released an excellent set of half-year results in which it posted record revenue, profits, and dividends, and beat expectations.

Is it too late to buy the stock now? Here’s my take. 

Demographic tailwinds

Let me start by saying that there are many things I like about Halma.

For starters, like many other Terry Smith-owned stocks, the company looks set to benefit from powerful demographic trends in the years ahead. Given its focus on safety services (gas detection, elevator safety), environmental services (water analysis and treatment), and medical services (diagnostics, patient assessment), the group looks very well placed to benefit from a number of big trends such as urbanisation, the world’s ageing population, and the increasing focus on sustainability. Throw in ever-increasing regulation, and you have a company that is very much in the right place at the right time.

This is well illustrated by yesterday’s half-year results. For the six-months to 30 September, revenue increased 12%, adjusted earnings per share rose 15%, and the dividend was hiked 7%. Not many FTSE 100 companies that are generating that kind of growth at the moment.

CEO Andrew Williams also said that the group “remains on track to make further progress in the second half of the year and deliver another good full year performance.”

Buffett-style company

I also like Halma’s high-quality attributes. Looking at the group’s financials, it’s very much a Warren Buffett-style company. For example:

  • The company has a good track record in relation to revenue and profit growth

  • Return on equity (ROE) is high, averaging 18% over the last three years

  • The balance sheet is strong with a low level of debt relative to equity

  • Free cash flow is high, which gives the company plenty of options

  • The company has a brilliant dividend growth track record having registered 21 consecutive increases

Overall, Halma looks to be the perfect type of company to buy and hold for the long term.

But is the stock a Buy today?

Priced to buy?

For the year ending 31 March 2020, analysts have pencilled in earnings per share of 57.6p. That means that at the current share price, the stock is trading on a lofty forward-looking price-to-earnings (P/E) ratio of 36.4.

Unfortunately, that valuation is just a little too high for me. I don’t mind paying a bit more for quality, and I could probably justify a P/E of around 25 here, but 36 is just a little too punchy for my liking.

So, for now, Halma will remain on my watchlist. Hopefully, there’s an opportunity to buy the stock at a lower valuation during the next market correction. 

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Edward Sheldon owns shares in Smithson Investment Trust. The Motley Fool UK has recommended Halma. 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.