Among a number of excellent FTSE 100 companies, Halma (LSE:HLMA) is an intriguing prospect that may have avoided many investors’ radars. This technology conglomerate, specialising in life-saving safety, health, and environmental technologies, has been steadily climbing over the last year. So is it a company that belongs in my own portfolio? Let’s dig in.
A great year so far
The shares have surged 20.5% over the past year, significantly outpacing the FTSE 100’s 6.4% gain after impressing in the latest earnings report.
With a market capitalisation of £10bn, the firm generated an impressive £2.03bn in revenue and £268.8m in earnings over the trailing 12 months. However, its price-to-earnings ratio (P/E ratio) of 37.2 times suggests that much of this success might already be priced in to the shares. This is a bit of a concern, so investors like me must carefully weigh whether this premium valuation is justified.
Diverse operations
The business has operated since 1894, and spans three main segments: Safety, Environmental & Analysis, and Healthcare. This diversification provides multiple growth avenues and a degree of insulation from sector-specific downturns. The Safety segment, in particular, addresses growing global concerns about security and infrastructure protection.
The company maintains a solid balance sheet with a debt-to-equity ratio of 41%, offering financial flexibility for future growth. For dividend investors, it provides a modest 0.8% dividend yield with a conservative 30% payout ratio.
Analysts project decent 8.1% annual earnings growth, indicating continued expansion. The company’s focus on innovation and strategic acquisitions in high-growth niche markets supports this outlook. Moreover, increasing global emphasis on the issues the firm addresses bodes well for the product portfolio.
Risks ahead
Despite its strengths, the firm clearly faces a number of risks. It operates in competitive markets, requiring constant innovation to maintain its edge. As a global business, it’s also exposed to currency fluctuations and geopolitical risks.
However, my key concern is that the shares are already well above fair value. According to a discounted cash flow (DCF) calculation, the shares are currently as much as 71% above estimated fair value. With the shares moving higher for the last year without many dips, any change in the market could easily see a sharp move down.
One for the watchlist
While Halma presents an attractive profile with its consistent performance, diversified business model, and excellent balance sheet, calling it a no-brainer buy seems an overstatement. Its premium valuation suggests that much of its potential is already recognised by the market.
I’d say the company’s solid fundamentals and promising outlook make it a worthy consideration for FTSE 100 investors. However, I’d be concerned about joining the party myself just as the music stops. It certainly warrants a closer look for those seeking exposure to the safety tech sector but I’ll only be adding it to my watchlist for now.
This post was originally published on Motley Fool
