Haleon (NYSE:HLN) sells health products internationally. The company has proven stable operations with modest growth and stable, high margins as the company invests in its brands – Haleon’s future cash flows seem likely to be stable as well. Haleon is expected to pay $0.10 in annual dividends, making the stock’s current dividend yield 1.26%. Since the company became publicly traded on NYSE in July of 2022, the stock price has appreciated modestly:
Haleon sells health-related products in North America with 36.4% of revenues in Q3, EMEA and Latin America with 41.3% of revenues, and Asia Pacific with 22.3% of revenues as told in Haleon’s Q3 presentation. The company’s offering includes products around oral health, pain relief, digestive health, vitamins, minerals, supplements, and respiratory health. The products are sold under numerous well-known brands, such as Sensodyne, Centrum, Otrivin, Voltaren, and Panadol.
Solid, Stable Financials
Haleon has achieved stable revenues in recent years and quarters. The company’s quarterly revenues have ranged between $3.12 billion and $3.68 billion from Q1/2021 to Q3/2023:
Most recently in the recently reported Q3 results, Haleon’s year-over-year organic revenue growth was 5.0% in constant currencies with the growth coming from EMEA & Latin America and Asia Pacific. Haleon’s well-known brands and further brand investments seem to be paying off, fueling the company for modest growth.
Despite a highly inflationary economy in recent years, Haleon has managed to keep up 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 risen well as the company has increased pricing to compensate for inflation. Consumers seem to have taken the price increases well, as the total revenue growth was still good in Q3. 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 that Haleon should be able to grow revenues at single-digit rates in coming years. The company is growing well in Asia Pacific with current nine-month volume increases of 7.1% year-over-year. Asia Pacific still represents a small portion of Haleon with 22.3% in revenues and seems to have room to grow well. Haleon is positioned well in the oral health industry with leading brands; the Q3 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 into its brands, which seems to have worked quite well so far.
Valuation Prices In Stability
Haleon’s stock trades at a forward P/E multiple of 22.6 at the time of writing – stable cash flows come at a price. To better evaluate Haleon’s valuation, I constructed a discounted cash flow model in my usual manner. In the model, I factor in a revenue growth mostly in line with Haleon’s historical rate – for 2024, I estimate a growth of 4.5%. The growth is below the constant currency organic growth of 7-8% in 2023, but as inflation seems to be slowing down, growth from pricing increases should come down. After 2024, I estimate the growth to come down slowly into a perpetual growth rate of 2.5%. Altogether, the DCF model’s revenue estimates represent a CAGR of 3.6% from 2022 to 2032.
I don’t see Haleon’s margins having significant drivers into either direction. For 2023, I estimate an EBIT margin of 22.2%, very slightly above the 2022 level. After 2023, I estimate the EBIT margin to come down into a figure of 21.1% – the estimated margin is Haleon’s previously mentioned quarterly average. The margin could come down from the higher 2023 level as the price increases are met with cost inflation, as part of the price increases are in my opinion likely to be precautious, and medium-term volume increases should require more modest pricing. Haleon has quite a good cash flow conversion, as the brand investments and expansion don’t seem to tie up a lot of capital.
With the discussed estimates along with a cost of capital of 7.20%, the DCF model estimates Haleon’s fair value at $8.58, around 4% above the stock price at the time of writing. The stock seems to be priced for a financial performance in line with Haleon’s history, which I see as reasonable.
The used weighed average cost of capital is derived from a capital asset pricing model:
In the most recent reported quarter, Haleon had $107 million in interest expenses. With the company’s amount of interest-bearing debt in the latest report using Seeking Alpha data, Haleon’s annualized interest rate comes up to 3.40%. Haleon utilizes debt quite well – the company is quite defensive, making the 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 equity side, I use the United States’ 10-year bond yield of 4.44%. The equity risk premium of 5.91% is Professor Aswath Damodaran’s latest estimate for the United States, made in July. As Haleon has become publicly traded quite recently, there aren’t beta estimates available for the company. Instead, I use other similar companies’ betas’ average as an estimate. For the peer estimates, I use Estee Lauder’s beta of 1.07, Beiersdorf’s beta of 0.22, and Shiseido’s beta of 0.59 with Yahoo Finance’s data, molding Haleon’s beta estimate into 0.63. Finally, I add a small liquidity premium of 0.2%, crafting a cost of equity 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 Pacific Asia, contributing to the company’s modestly growing topline. As the financial performance is very stable, I don’t think that investors should expect an extraordinary stock performance, but a significant loss in value is equally as unlikely. A fair amount of growth seems to be priced into the current stock price, as my DCF model estimates the stock to be roughly correctly priced. For the time being, I have a hold rating for the stock.