The five-year earnings growth record from Halma (LSE: HLMA) looks impressive, with annual rises accelerating to reach 17% in 2017.
Last year did benefit from favourable currency movements and the rate of growth should slow, but we’re still looking at forecasts for 9%-10% for the current year and next.
Thursday’s update from the safety, health and environmental technology group supports that optimism, with pre-tax profit for the year to 31 March likely to be in line with market expectations.
Order intake has continued ahead of revenue, for which the firm cites “the diversity of its markets and resilient growth drivers.“
No weak spots
One thing that does impress me is the breadth of Halma’s progress, with no apparent weaknesses either by division or geography. We heard that “all sectors have traded in line with our expectations,” with Halma adding that “Asia Pacific has maintained a strong performance with good progress in the UK, USA, Mainland Europe and other regions.“
My only real caution is that Halma’s growth has been largely through acquisition, with the latest, of Argus and Sterling for £21m, coming in December.
But Halma tells us its financial position is strong, and at the halfway stage at 30 September 2017, net debt was impressively down from £273m a year previously to £181m — and that’s less than EBITDA.
And crucially, Halma reports organic constant-currency revenue and profit growth. It seems to be making canny acquisitions at good prices while markets are sluggish and providing the opportunities. I see a good long-term buy here.
Faster growth
While examining companies with rapidly-rising earnings, I’m struck by Dechra Pharmaceuticals (LSE: DPH). We’ve seen EPS more than treble over the past five years at the veterinary medicines specialist, and the share price has gone along with it — up 3.5 times over the same period.
Shares with that kind of record don’t sell cheaply, and Dechra is no exception with its shares on a lofty P/E of 35 for the year to June 2018. But with a further 17% hike in earnings expected this year, followed by 18% next, the 2019 multiple would drop to under 30 — still high, but perhaps not unreasonably so.
Dechra’s earnings progress, like that of all growth stocks, will eventually slow, and it needs to demonstrate the ability to turn from early growth to mature income. On that front, dividend progress has been reassuring — it’s gone from 14p per share in 2013, to 21.44p in 2017, and there are further inflation-beating rises on the cards for the next two years.
Low yields
My main concern is that those dividends are only providing yields of around 1% at the moment, and as they already account for around a third of earnings per share, we’re certainly not looking at massively-covered early token dividends.
So it’s a valuation issue for me, and if EPS growth were to slow significantly in the next few years, I could see the shares being re-rated downwards and bringing prospective dividend yields up a bit.
But if the next five years of growth come close to the last five years, Dechra could still be a good long-term buy. At the halfway stage of the current year, the company was already reporting underlying operating profit growth of 22.3%. And like Halma, it’s also growing partly by acquisition.
