On Tuesday, Haleon was a top FTSE 100 performer with high volumes traded. As I write, the share price stands at 273p.

So, what does Haleon do? Where has the company sprung from? And should I be looking to invest in it?

A FTSE 100 giant subsidiary

Haleon was born out of GSK, a pharmaceutical giant, as its own independent company. It has taken ownership of some big-name brands such as Aquafresh, Panadol, Voltaren, and Nicorette.

The company is a dominant player in supplying oral health, pain relief and vitamin products.

The American pharmaceutical giant Pfizer owns a 25% stake in the new company.

The separation follows as GSK plans to focus its investment efforts on vaccines and speciality medicines. By contrast, Haleon — with a fresh balance sheet — will be a cash-generative business with quality brand names intended to attract investors looking for sustainable growth.

The latest earnings report

During the first week of trading, claims against GSK that one of its drugs, Zantac, causes cancer applied downward pressure to the Haleon share price.

Soon after listing, Haleon increased its expectations for revenue growth. It claims its brands have relatively inelastic demand even when faced with economic uncertainty.

Market commentators speculated otherwise, expecting that consumers would be downgrading to supermarket own-brand products. However, September earnings met expectations with no downside surprise.

This has acted as a springboard for the share price, which has stabilised at 5% higher since the earnings report.

Should I invest?

Meeting its initial growth targets is growing confidence among investors in the new corporate entity and its strategy.

Encouragingly, the company’s e-commerce sales are growing fast and have climbed to 9% of all revenue generation. Analysts are forecasting a 6.8% in annual revenue growth in the medium term.

Over 10 research firms have assigned Haleon a rating of “hold” as their recommendation.

Haleon’s balance sheet currently has relatively low levels of debt in comparison to GSK. Its rich cash flow also gives it plenty of opportunity to manage the debt going forward. This is certainly something I like to see in the face of rising interest rates.

Haleon’s strong portfolio of brands is already holding up against economic decline. With the company newly established, I certainly think there’s an opportunity for the share price to reach new highs as investors chase defensive stocks.

However, the UK recently reported a 0.3% economic contraction. The extent to which contraction continues nationally and internationally may begin to have a more noticeable influence over consumers substituting brands.

There is also a question about GSK’s potential legal liabilities due to its sale of Zantac. Trials will begin next year. Haleon is also at risk to liability but claims otherwise as it has never marketed Zantac. Either way, the outcome of the dispute is likely to have a big impact on the price for both companies.

I plan to buy shares in Haleon should the price fall below 270p again, with the hope that the earnings report on 10 November will be just as solid as the last.

With the pound now at its weakest point against the dollar in decades, I’m buying firms that could benefit from this currency depreciation. After all, the pound has depreciated 20% against the dollar over the past six months.

So, if a FTSE 100 company made half of its revenue from dollar sales, the 20% depreciation of the pound would lead to a 10% increase in total revenue when converted back into GDP — assuming sales remained constant throughout the period.

So, here are three stocks that I’m buying as the pound crashes.

Unilever

Unilever (LSE:ULVR) is a fast-moving consumer goods company based in London. The firm sells in 190 countries and claims that 3.4bn people use its products every day. It also earns 58% of its income in emerging markets.

Approximately 17% of the company’s revenue comes from the US. This segment of the business’s income should be considerably inflated in the coming months when converted back into GBP. But this is also the case for other developed markets — the pound is the worst-performing currency in the G7.

I do have concerns about costs increasing as a result of the pound depreciating, but I’m still backing the firm to outperform over the next year.

I also like Unilever because of its pricing power and defensive qualities. It owns many household brands such as Hellmann’s, Marmite, Heinz, Persil, and Lifebuoy. The latter is a soap brand that only appears to be sold in developing nations. And well-known brands tend to do better when economies go into reverse.

Diageo

Diageo (LSE:DGE) only generates a small proportion of its revenue from the UK. The London-based company owns 200 brands and sells in more than 180 countries. The firm claims that its portfolio offers something for every taste and celebration.

Over the past year, the drinks maker made approximately twice as much income in North American markets, where currencies have stayed strong, than in Europe, where the pound and euro have weakened considerably.

And at the beginning of the year, Diageo contended a strong pound had negatively impacted earnings. But now, with the pound at $1.07, it’s going to have a positive impact on earnings.

Diageo also has defensive qualities, selling brands like Johnnie Walker, Guinness, Baileys, and Smirnoff. A drawn-out recession probably won’t be good for alcohol consumption, but I’d still expect the firm to do well over the next year.

Haleon

Haleon (LSE:HLN) was formed after a demerger with GSK earlier this year. The new consumer goods company serves more than 100 markets worldwide. And, according to the company itself, it has an established presence in “all key channels“. So with the pound depreciating, Haleon should see its GBP income appreciate accordingly.

Haleon owns brands like Sensodyne, Advil, and Voltaren, all of which are household names, giving it defensive qualities. The share price is also depressed right now because of a US lawsuit, although I gather the company doesn’t anticipate be made liable should GSK lose.

This sounds like a decent stock. So, why has it performed poorly?

Zantac lawsuits

In 2020 the US Food and Drug Administration (FDA) requested Zantac be pulled from the market. European regulators followed suit over concerns the heartburn drug appeared to produce high levels of a cancer-causing chemical when heated. A couple of thousand personal injury cases were then launched.

A UBS research note about the risks to Sanofi from the trials, the first of which started at the end of August 2022, kicked off a sell-off in several healthcare companies’ stocks. This happened on 10 August, and the Haleon share price started tumbling on that day. But where is the link to Haleon?

GSK marketed over-the-counter (OTC) Zantac in the US through a joint venture with Warner-Lambert between 1996 and 1998. Pfizer had the rights between 2000 and 2006. GSK and Pfizer combined their consumer healthcare businesses in 2019. The combined business was later spun off to form Haleon.

Is Haleon at risk?

Haleon has said in a statement that it is not a party to nor primarily liable for any Zantac claims. It has never marketed it in the US. But, Haleon also said that it might have to compensate GSK or Pfizer or both if they are held liable in respect of OTC Zantac if certain conditions are met.

Sanofi, the prime target of the lawsuits, has stated that “the data shows there is no evidence of consumer harm from real-world use of Zantac“. GSK said in a statement that the FDA and European regulators have ruled that there is no evidence of a causal association between treatment with Zantac‘s active ingredient Ranitidine and cancer development.

On balance, I will say that the risk of Haleon having to make a substantial payout is low.

Where next for the Haleon share price?

Unilever offered £50bn to GSK for what is now Haleon in January 2022. The pending Zantac lawsuits were public knowledge. Unilever would have been aware of them and Haleon’s 6% annual revenue growth since 2019. It would have seen this was a solid-cash generating business with operating margins of around 17% over the last couple of years.

Some may say that Unilever would have overpaid if it had been successful. But, consider that the average takeover premium for healthcare businesses was 27.3% in 2018, according to Statista. Unilever’s offer was 20% above Haleon’s market-determined debut enterprise value (EV) of £40bn. If anything, Unilever might have made a lowball offer.

Although those lawsuits could drag on and keep the Haleon share price depressed, I think this is a buying opportunity. If I add the £10.5bn of debt Haleon inherited from GSK to its current market cap of about £23bn, its current EV is about £33.5bn. Unilever thought it was worth £50bn.

The company has not declined operationally since Unilever’s offer, as far as I can tell. I will add to my Haleon position in my Stocks and Shares ISA.

I’m looking at defensive stocks right now, and these are companies that tend to perform better than others when things get tough. Typical examples include water, utilities, and branded consumer goods — customers tend to be wedded to brands, even when disposable incomes are being squeezed.

This is why Haleon (LSE:HLN) is one of my best stocks to buy right now. The fast-moving consumer goods firm only came into existence a month ago following a split with GSK. Its share price has tanked during that month and it now has a market value half of what Unilever offered GSK for it earlier in the year.

So, let’s take a look at why I’m backing this stock for big gains in the autumn and beyond.

Discounted share price

Haleon shares didn’t do too bad after listing. They never went up, but swayed between 5% and 10% under the listing price.

However, investors developed concerns in August about forthcoming legal cases being brought against GSK. The nearly 3,000 cases concern historic sales of heartburn drug Zantac and negative health effects.

GSK says there is no evidence Zantac causes cancer, while Haleon has distanced itself from the proceedings, saying it is not party to the claims. The first case against GSK was dismissed. But the GSK and Haleon share prices are still down.

From what I’ve read, Haleon doesn’t seem to be facing too much risk from these Zantac cases.

Haleon is now down 16% over the past month. It currently has a price-to-earnings (P/E) ratio of around 17, and a forward P/E of around 15.5.

That’s not particularly cheap, but stocks with defensive qualities don’t tend to come cheap. This is because they’re largely able to continue delivering on targets even if economic conditions get worse.

Defensive qualities

When macroeconomic conditions worsen, investors look for defensive stocks. Haleon owns brands like Sensodyne, Advil, and Voltaren, all of which are household brands.

That gives it pricing power and the capacity to pass on costs to consumers. As the share price settles, I’m expecting investors to start buying Haleon shares as a defensive purchase.

Other defensive stocks such as Unilever have been pushing upwards in recent months. It’s worth noting that Unilever trades with a P/E of 20. As noted, defensive stocks aren’t cheap and will be increasingly in demand as the year progresses.

Positive forecast

A long, deep, and drawn-out recession won’t be good for consumer spending, but that’s not what we’re expecting in the UK. Instead, the recession will be shallow and the forecast is pretty steady for Haleon.

“Haleon has an adequate collection of brands and market positions which should enable the group to grow organic sales at the low end of its 4-6% guidance“, Royal Bank of Canada said in a recent coverage update. The analysts have a price target of 300p.

This is slower than over the previous year, but still positive. Haleon sales rose 14% to £2.6bn as of GSK’s last report, with strong growth across all categories.

With the above in mind, I’ve already bought Haleon shares, and would buy more at the current price.

New name, old business

Although Haleon has a short history as an independent listed company, the business itself has been established for decades. Indeed, it owns a variety of household name brands, including Nicorette and Sensodyne.

We also have some sense of how the business has performed over the years, from when it was part of GSK. Just separating Haleon out into a separate company should not on its own dramatically change sales performance in the short term, I reckon.

But what could be different is the cost base. Now able to focus exclusively on its own research and development, Haleon may seek to grow its portfolio. That could hurt profits by adding costs in the short term.

Another potential risk to profits is the cost of providing central corporate functions that were previously shared with GSK. Then again, maybe as a leaner independent company, Haleon can be more ruthless in managing costs than GSK was. That could be good for profits.

Haleon share price valuation

But given all these uncertainties, how is it possible to put a value on Haleon shares before the company issues reports and accounts as an independent company?

For now, such valuations rely on a variety of presumptions. Time will tell whether they are accurate. But one thing puzzles me. At the moment, Haleon commands a market capitalisation of £25bn. It also has about £10bn of debt on its balance sheet, so the market capitalisation does not tell the full story.

Nonetheless, even allowing for the debt, Haleon’s value is far below the £50bn offered for the business just last year by Unilever.

Did Unilever get its sums wrong? It is in the same business, so I would expect it to be able to value Haleon fairly accurately. Could it be that Unilever as a trade buyer hoped to unlock benefits from acquiring Haleon that would not be captured in a purely financial deal? I think that may be true – but the valuation gap is still striking. Haleon has left around £15bn on the table at its current valuation compared to if it had accepted Unilever’s approach last year.

My move on Haleon shares

I reckon that now may indeed offer a unique buying opportunity to buy Haleon shares. The market does not yet have the sort of information I think it would need to make a full valuation. But we do know that the company is on sale for much less than a key rival offered to pay.

But while Unilever may know how to value the firm given its industry expertise, for me, as a private investor, the absence of much financial information on Haleon as a standalone business makes it difficult. For the moment, therefore, I will not be adding Haleon shares to my portfolio.

Haleon share price journey

As a quick reminder, Haleon is now the largest standalone consumer healthcare goods business in the world. This comes after its demerger from global giant GSK. Some of its best known brands are staples in many consumer’s medicine cabinets, mine included, and include Night Nurse, Beechams, Piriteze, and Sensodyne to name a few.

So what’s the current state of play with the Haleon share price? Well, the shares listed last month for a price of 320p per share. As I write, they’re trading for 268p, which is a 16% decline in approximately a month. It is worth noting that the listing was the largest in Europe for close to a decade.

The investment case

Let’s start with some positives around Haleon shares then. I am buoyed by a few key elements. Firstly, the strength and brand power of some of its brands is unrivalled in the consumer healthcare market. These could help boost sales, performance, investor sentiment, and returns in the longer term.

Next, I noticed that a number of insiders have been buying shares since the Haleon share price listed. I find this positive, as who better to attest to the direction and potential of a business than those with an inside track. Haleon Chairman Sir Dave Lewis purchased £200,000 worth of shares just after the listing. Furthermore, two non-executive directors spent approximately £65,000 on shares too.

Finally, Haleon upgraded its forecast for its first full-year update when it released a half-year report at the end of July. The H1 update made for excellent reading, in my opinion. Revenue increased by close to 14% compared to the year previous, driven by organic growth, higher prices, and increased volumes. It also pointed towards the power-boosting performance of certain of its brands, namely Panadol, Advil, and Centrum. However, the positive report did not boost the Haleon share price.

So to some risks associated with Haleon shares then. Firstly, macroeconomic headwinds could have a longer-term impact on results and returns. Soaring inflation, the rising cost of materials, as well as the global supply chain issues could affect profitability and operations.

Next, I’m a bit worried by Haleon’s current debt levels. Debt is usually a red flag for me because it can impact levels of returns and future growth plans. I want to see further results and how the company plans to pay down debt, as well as growth plans to learn more.

What I’m doing now

I do believe that Haleon could be a good stock to buy for growth and returns in the longer term. Furthermore, analysts believe the Haleon share price will recover and increase steadily. I am keen to learn a bit more about the company’s direction, as well as its plan to combat current debt levels in the coming months and updates ahead, however.

So, what’s going on with these two UK stocks? And has the recent share price weakness provided a buying opportunity for me?

Why GSK and Haleon are down this week

The reason the two companies have seen their share prices fall this week is that investors are concerned about US litigation related to Zantac, a heartburn drug. Zantac – which was originally marketed by a forerunner of GSK – was withdrawn from shelves in 2019 after being linked to cancer.

According to Credit Suisse, more than 2,000 lawsuits have been filed in the US (against a number of healthcare companies that sold the drug), with the first trial beginning later this month. And analysts at Morgan Stanley say the total damages could be as high as $40bn.

I’ll point out that this is not exactly new news. The issue has been rumbling on in the background for several years now and in its recent prospectus, Haleon highlighted the risk of potential lawsuits. However, the litigation has received more media attention lately, and as a result, investors have panicked.

“I think the panic … really comes down to market psychology as opposed to having learned anything new,” wrote Barclays analyst Emily Field in an email earlier this week.

Zantac statements

It’s worth noting that both GSK and Haleon have released statements regarding Zantac litigation today.

It its statement, GSK said:

• Based on investigations and experiments, GSK, the US Food & Drug Administration (FDA), and the European Medicines Agency all independently concluded that there’s no evidence of a causal association between Zantac and the development of cancer.
• Plaintiff litigation is inconsistent with the scientific consensus and the company will vigorously defend all claims.

Meanwhile, in its statement, Haleon said:

• It’s not aware of any material developments in relation to the Zantac litigation since the Haleon prospectus was issued in June.
• It’s not a party to any of the Zantac claims.

These statements suggest to me that both companies believe that they’re in the clear here.

Is this a buying opportunity?

After the recent share price falls, both GSK and Haleon trade at relatively low valuations. GSK trades at around 11 times this year’s forecast earnings while Haleon trades at around 15. So, there could be some value on offer here. However, given the uncertainty over the litigation, I’m not convinced the risk/reward is so attractive right now.

Looking past the potential litigation, there are other issues that concern me. GSK has lost its consumer health business, which was the area of the business I liked the most due to its stability. Without this, revenues could be more volatile.

Meanwhile, Haleon has a huge debt pile, which is an issue in a rising-interest-rate environment. Additionally, GSK and Pfizer plan to sell their Haleon shares when the lock-up period ends in November. This could put pressure on the share price.

All things considered, I think the best move, for me personally, is to leave these two stocks alone for now and focus on better, safer opportunities.

The listing — the largest in Europe for over a decade — was long-awaited. Haleon is now the world’s largest standalone consumer health business.

So, are Haleon shares set to soar, and is it right for my portfolio?

Performance

Haleon directors clearly have some faith in the business. Chairman Sir Dave Lewis spent £200,000 on shares on last week. The purchase came shortly after the consumer healthcare company upgraded full-year revenues guidance in its maiden trading update.

Meanwhile, two other non-executive directors spent £65,000 on the stock, and a person connected with the company’s chief supply officer invested £60,000.

Last week the firm posted interim revenues of £5.18bn, up 11.6% year on year. Haleon stated that it was principally driven by organic revenue growth, higher prices, and an improved volume mix. Organic revenues rose 11.6%, while prices were up 3.7% and volume mix 7.9%.

The FTSE 100-listed firm said that Panadol, Theraflu, Otrivin, Advil, and Centrum brands all had “particularly strong” showings in the first half of the year.

Upside potential

Firstly, Haleon is confident it can deliver growth in the near term, and that’s important considering the macroeconomic environment.

In the trading update, management said that it was upgrading its full-year organic revenue growth ahead of medium-term guidance range. “We continue to invest to drive sustainable growth and remain confident in delivering on our medium-term guidance,” the statement read.

Haleon certainly has some defensive qualities, namely the strength of the brands it owns. Brands with strong reputations tend to perform well even when economies go into reverse.

But more generally, the demerger was seen by many as a positive for both GSK and Haleon. In fact, after the split, Credit Suisse initiated coverage of Haleon at “outperform” with a 368p price target. 

And there are several positive indicators that the share price could push higher.

Haleon’s enterprise value is around £40bn, taking into account the company’s £10bn in debt. So that’s some distance ahead of its current £28bn market cap.

It also has a forward price-to-earnings ratio of around 18 — more than the FTSE 100 average — given Barclays’s EPS forecast of 16.6p for 2022. Barclays contend that the firm will achieve revenues of around £10.7bn this year, up from £9.6bn last year. It’s a considerable jump from just £4bn in 2014.

Would I buy Haleon shares?

I’m actually holding off buying Haleon shares as I want to see more evidence that the business is moving in the right direction. Debt is an issue and I want to see that it’s at a level that doesn’t impede the firm’s growth. Haleon starts life with a net debt-to-cash-profits ratio of around four, twice that of GSK.

History suggests consumers tend to stay loyal to healthcare brands in a recession, rather than trading down to cheaper options. I reckon Haleon could be a great long-term investment for my portfolio. With the stock hovering around the £3 mark, should I buy?

Why Haleon should be a cash machine

Although Haleon’s advertising focuses heavily on its scientific credentials, the reality is that this business is all about marketing and brands.

Most of Haleon’s core products have been largely unchanged for years. The company only spent £257m on research and development last year. That’s just 2.7% of its £9,545m turnover.

In comparison, I estimate that GSK’s pharmaceutical business spent around 20% of its turnover on R&D last year, excluding Haleon.

To sum up, Haleon has a portfolio of strong brands, which generate consistent sales and have low R&D costs. This is why I believe this business is a cash machine that could generate rising dividends for many years to come.

Will the share price keep falling?

Newly-listed companies are often priced quite high in my experience, so it can pay to be patient.

Haleon seems to be following this pattern, at least so far. The stock listed at 330p, but is down by 12% at 290p as I write.

Another possible reason to be cautious about buying the shares is that US pharmaceutical firm Pfizer is now planning to sell its 25% stake in Haleon.

Pfizer has promised to sell the shares in an orderly way, but it will need to find buyers for nearly £7bn of stock.

What may happen is that if big funds want to buy Haleon, they’ll buy from Pfizer rather than buying in the market. That could leave Haleon’s share price struggling for support.

Haleon shares: what I’m doing

A post-pandemic surge in cold and flu infections is expected. That would be good news for Haleon, whose portfolio includes several popular cold and flu medicines.

However, although I expect Haleon’s cash generation to be strong this year, the stock’s forecast dividend yield is just 1.1%. This figure rises to 2.1% for 2023, but that’s still pretty low.

The main reason for this low yield is that cash is required to reduce the £10bn debt pile Haleon inherited from GSK. I don’t think this will be too much of a problem, but CEO Brian McNamara expects to need three years to bring leverage down to target levels.

I think Haleon shares could offer long-term value at current levels. But in my view, the combination of the Pfizer share sale and the stock’s low dividend yield could mean that the Haleon’s share price drifts lower over the coming months.

For these reasons, I’m going to wait a little longer before deciding whether to buy.

Meanwhile, the former GlaxoSmithKline has rebranded as GSK — a growth stock prioritising R&D and commercial investment in vaccines and speciality medicines. The GSK share price has remained largely flat after an initial 19% crash when the spin-off was announced.

Let’s explore which stock I’d buy in August.

Haleon

Haleon owns a range of household brands, including Sensodyne toothpaste and Panadol painkillers. It operates in over 100 markets worldwide. The firm will benefit from leadership continuity with Brian McNamara remaining at the helm after having run the unit when it was still part of Glaxo.

Revenue for Q1 FY22 was £2.62bn, up from £2.3bn a year ago. In addition, the company delivered an impressive 4.4% compound annual growth rate in sales from 2019 to 2021. It expects growth will remain in a 4%-6% range this year.

Pfizer recently announced plans to divest its entire 32% stake from November. This makes Haleon a key takeover target. If the business thrives, I believe an acquisition could be good news for shareholders who would stand to benefit. However, there’s a risk it might struggle and a takeover could occur while the valuation is depressed.

Indeed, Haleon has a lot to live up to. GSK rejected a £50bn offer for the business from Unilever earlier this year — well above its £30.5bn market cap on the first day of trading. It also inherited a £10bn debt burden from GSK. This could be a headwind for the Haleon share price if it fails to achieve its debt reduction goals.

GSK

GSK is now a pure biotech stock. Newly approved HIV treatments and a promising pipeline of oncology drugs are both strings to GSK’s bow.

In addition, the FTSE 100 pharma giant recently raised revenue and profit guidance following record sales of its shingles vaccine, Shingrix, which more than doubled to £731m. What’s more, in Q2 FY22 the business delivered revenue growth across all three divisions.

I find the stock’s price-to-earnings ratio of 13.36 appealing. It’s considerably lower than those of competitors AstraZeneca. At the current level of £17.28 per share, I can certainly see the case for GSK as a value investment proposition.

However, I have concerns that due to its separation from Haleon, GSK has lost a highly cash-generative part of its business. The company anticipates it will slash its dividend to 45p per share for 2023 from the 80p per share it has distributed over the past five years.

Which stock should I buy?

Although Haleon shows promise as an individual business, it’s too early for me to invest at present. I’d like to see some concrete financial results and cuts in the debt balance before I buy.

On the other hand, I would buy GSK shares today. While the company may not continue to offer big dividend payments, I’m excited by the new focus on growth opportunities and the potential for capital appreciation.