Haleon (NYSE:HLN) sells health products internationally. The company has demonstrated stable operations with modest growth and stable, high margins as the company invests in its brands – Haleon’s future cash flows look set to be stable as good. Haleon is expected to pay $0.10 in annual dividends, making the stock’s current dividend yield 1.26%. Since the company went public on the NYSE in July 2022, the stock price has appreciated modestly:
Haleon sells health-related products in North America with 36.4% of revenue in the third quarter, EMEA and Latin America with 41.3% of revenue and Asia Pacific with 22.3% of revenue, according to Haleon’s Presentation of Q3. The company’s offering includes products around oral health, pain relief, digestive health, vitamins, minerals, supplements and respiratory health. The products are sold under many well-known brands, such as such as Sensodyne, Centrum, Otrivin, Voltaren and Panadol.
Stable, stable finances
Haleon has achieved consistent revenue in recent years and quarters. to the company quarterly income have fluctuated between $3.12 billion and $3.68 billion from Q1/2021 to Q3/2023:
Most recently in its recently reported third quarter results, Haleon’s year-over-year organic revenue growth was 5.0% in constant currencies with growth coming from EMEA and Latin America and Asia Pacific. Haleon’s established brands and further brand investments appear to be paying off, propelling the company to modest growth.
Despite a very inflationary economy in recent years, Haleon has managed to maintain a good and stable margin level. Since the beginning of 2021, Haleon’s average quarterly EBIT margin has been 21.1%:
In recent quarters, Haleon’s margin has grown nicely as the company has raised prices to offset inflation. Consumers seem to have taken the price hike well, as total revenue growth was still good in the third quarter. In the quarter, Haleon increased prices by 6.6% year over year and volumes decreased by -1.6% in the quarter.
Future growth seems likely
I believe Haleon should be able to grow revenue at single-digit rates in the coming years. The company is growing well in Asia Pacific in the current nine months volume growth of 7.1% year after year. Asia Pacific still represents a small portion of Haleon at 22.3% in revenue and appears to have room to grow well. Haleon is well positioned in the oral health industry with leading brands; third quarter oral health segment growth of 9% demonstrates Haleon’s strong positioning, as achieving such growth in a mature market is impressive. The company is investing further in its brands, which seems to have worked quite well so far.
Evaluation Prices in Stability
Haleon shares trade at a forward P/E multiple of 22.6 at the time of writing – stable cash flows come at a price. To better estimate Haleon’s valuation, I built a discounted cash flow model in my usual way. In the model, I factor in revenue growth largely in line with Haleon’s historical rate – for 2024, I estimate growth of 4.5%. The increase is below constant organic currency growth of 7-8% in 2023, but as inflation appears to be slowing, the increase from price increases should moderate. After 2024, I estimate that growth will slowly decline to a permanent growth rate of 2.5%. In total, the DCF model’s revenue estimates represent a CAGR of 3.6% from 2022 to 2032.
I don’t see Haleon’s limits having significant push in either direction. For 2023, I estimate an EBIT margin of 22.2%, very slightly above the level of 2022. After 2023, I estimate that the EBIT margin will fall to a figure of 21.1% – the estimated margin is the previously mentioned quarterly average of Haleon. Margin may slip from 2023 high as price increases face cost inflation, as some of the price increase in my view is likely to be cautious and mid-term volume growth should require more modest pricing . Haleon has a fairly good cash flow conversion, as investments and brand expansion do not seem to tie up much capital.
With the valuations discussed together with a cost of capital of 7.20%, the DCF model estimates Haleon’s fair value at $8.58, about 4% above the stock price at the time of writing. The stock appears to be priced for financial performance consistent with Haleon’s history, which I see as reasonable.
The weighted average cost of capital used is derived from a capital asset pricing model:
In the most recently reported quarter, Haleon had $107 million in interest expense. With the company’s amount of debt with interest in the latest report using Alpha Research data, Haleon’s annual interest rate stands at 3.40%. Haleon uses debt quite well – the company is quite defensive, making debt safer in nature. For the company’s long-term debt-to-equity ratio, I estimate a figure of 20%.
For the risk-free rate on the cost of capital side, I use the 10-year United States bond yield of 4.44%. The equity risk premium of 5.91% is by Professor Aswath Damodaran most recent assessment for the United States, made in July. Since Haleon only recently became publicly traded, there are no beta ratings available for the company. Instead, I use the average beta of other similar companies as an estimate. For peer reviews, I use Estee Lauder’s beta of 1.07Beiersdorf’s beta of 0.22and Shiseido’s beta of 0.59 with Yahoo Finance data, forming Haleon’s beta estimate at 0.63. Finally, I add a small liquidity premium of 0.2%, creating a cost of capital of 8.36% and a WACC of 7.20%.
Haleon has historically had and continues to have a stable financial performance. The company is growing well in Asia Pacific, contributing to modest growth in the company’s top line. Since the financial performance is very consistent, I don’t think investors should expect a tremendous stock performance, but a significant loss in value is equally unlikely. A fair amount of upside appears to be priced into the current stock price, as my DCF model estimates that the stock is roughly priced correctly. At the moment, I have a hold rating on the stock.