Earlier this week, pharma giant GlaxoSmithKline spun off its consumer health division. The new company – which like GSK is listed on the London Stock Exchange – is called Haleon (LSE: HLN).
Naturally, the new listing (the largest in Europe for over a decade) has received a lot of attention from investors. After all, Haleon is the world’s biggest standalone consumer health business and owns some world-class brands including Sensodyne, Advil, and Voltaren.
I’ve been looking to boost my healthcare exposure within my portfolio recently as I believe this sector could offer a nice mix of growth and defence going forward. Should I buy Haleon shares then? Let’s discuss.
Should I buy Haleon shares today?
There’s a lot to like about Haleon from an investment perspective, to my mind. For starters, there’s the company’s strong brands that are well known and trusted all over the world. That, therefore, provides a competitive advantage. They also give the company pricing power, which is handy in the current inflationary environment.
There’s also the defensive attributes. People tend to buy toothpaste, painkillers, and digestive products no matter what’s happening in the global economy. So if we were to experience a recession in the near future (a real possibility), I’d expect Haleon’s sales to hold up well.
Meanwhile, the company also has solid long-term growth potential. According to Market Data Forecast, the global consumer health market is expected to grow by around 7.2% a year between now and 2027 to reach $301bn. This market growth should provide nice tailwinds for Haleon. It’s worth noting that for the quarter ended 31 March, sales rose 14% to £2.6bn while profit before tax jumped 33% to £450m.
On top of all this, Haleon could potentially be a takeover target. Recently, Unilever has shown interest in the company (while it was still part of GSK). Reckitt is another company that could potentially be interested in its assets.
Downside risk?
Having said all that, there are some risks that concern me here. One is the company’s debt pile. The Haleon prospectus shows that at 31 March, the company had long-term borrowings of £9.4bn. Net debt was about £10.3bn. This adds risk, especially in a rising interest rate environment.
Another issue is that both GSK and Pfizer own a ton of Haleon shares and plan to reduce their holdings when the lock-up period ends in November. This could potentially put downward pressure on the share price.
Meanwhile, there’s the valuation. Right now, it’s a little hard to find information about future earnings per share (EPS) because the company has just come to the market.
Barclays, however, has an EPS forecast of 16.6p for 2022. That puts the stock on a forward-looking P/E ratio of about 18.5. Given that the net debt-to-EBITDA ratio here is about 4.3 (a ratio near five is sometimes seen as a red flag) that valuation could be a little high.
My move now
Weighing everything up, I’m happy to keep Haleon shares on my watchlist for now. This is certainly a stock I might consider for my portfolio at a later date. However, right now, I think there are better opportunities elsewhere.