Excerpt: With Halma shares back at their 2020 levels, Stephen Wright sees an opportunity for his Stocks and Shares ISA.
As a UK taxpayer, a Stocks and Shares ISA saves me from paying capital gains tax on my investment returns. That can be extremely valuable, but it’s important to find the right stocks to buy.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
In my view, Halma (LSE:HLMA) is one of the strongest FTSE 100 companies around and the stock looks like a bargain. The share price is at 2020 levels, but the business is in a much better position.
A growing business
Halma is, in many ways, an archetypal growth stock. Over the last 10 years, the company has increased its turnover by an average of 10% per year and its earnings per share at 8%.
The firm has achieved this in two ways. One is by acquiring other businesses and adding them to its network and the other is by increasing their revenues and profits by making them more efficient.
This kind of growth is somewhat dependent on opportunities presenting themselves and Halma’s progress hasn’t been linear. But over time, the company has found ways to keep growing.
There’s also risk with this kind of strategy. It’s possible to pay too much for a business (more on that later) and destroy value in the process.
Halma’s management, though, has an exemplary track record in this regard. And it doesn’t look as though the firm is in danger of running out of opportunities any time soon.
A buying opportunity?
Since the start of 2022, Halma’s share price has fallen by around 31%. That puts the stock back where it was in February 2020.
The underlying business is in better shape than it was back then, though. In 2020, the company was making £1.2bn in revenue, £218m in operating income and 45p in earnings per share (EPS).
Since then, revenues have increased to £1.8bn, operating profit is £308m, and EPS is up to 62p. That makes the equation much more attractive from a valuation perspective.
I mentioned earlier that Halma’s management needs to be wary of overpaying for acquisitions. And the same is true of investors thinking about buying Halma shares.
At a price-to-earnings (P/E) ratio of 35, the stock isn’t obviously cheap. But it’s at a level where I think continued strong growth could make this an investment that works out well over time.
A top FTSE 100 stock
Halma’s growth has been impressive. And I can’t think of a FTSE 100 company that I anticipate having better prospects for the long term.
Others, such as Rolls-Royce might benefit more from cyclical upswings. But when it comes to consistent, durable growth, I’d argue that Halma is the best around.
The stock was probably overpriced at £22 per share back in 2020. With the growth the company has seen since then, though, it looks like could be a great addition to my Stocks and Shares ISA.
Investing well in the stock market comes down to buying shares in quality companies at decent prices. And I think there’s an opportunity right now to do just that with Halma shares.
