Halma (LSE:HLMA), the safety, environmental, and healthcare technology conglomerate, is arguably one of the more stable companies in the FTSE 100. It has a long multi-decade history of financial and operational success. Also, it diversified itself well into a holding company. Therefore, it has less risk of concentrating too much on any one product or service set.
A stalwart with continuing growth
This company has been around since 1894, and it continues to grow. In fact, over the past 10 years, the shares have gained a massive 315% in price.
At the moment, Halma has a portfolio of approximately 40 subsidiaries. It plans to continue to acquire small to medium-sized companies, expanding its presence in global niche markets.
Furthermore, its presence in over 20 countries provides great geographic diversification. Its established position in the US and Europe, as well as exposure to emerging countries, sustains growth and protects from country-specific risks.
These reasons are foundational to why I consider Halma a stalwart, stable company with slow and steady growth prospects.
Is the valuation worth my cash?
Despite the long-standing reputation of Halma, as well as its steady revenue and earnings growth, arguably, its valuation is too rich.
At the moment, the shares have a price-to-earnings (P/E) ratio of 36 and a price-to-sales (P/S) ratio of 4.8. Arguably, this is too high to make the company a worthy value investment. This is especially true as the industry median P/E ratio is a much lower 13.
However, the market has sustained Halma’s high valuation for many years. Its P/E ratio as a 10-year median is 34.5. So, despite the risk of it being above the common valuation for companies like it, I don’t think this means the stock will contract in price.
Instead, I expect its share price growth to continue, but I think this will be moderate. Any significant inhibitions that arise in its operational prospects could also lower investor sentiment, leading to a valuation decline.
Halma could be over-diversifying
As the company is so diverse, management needs to make sure that each of its subsidiaries is continuing to contribute positively to the conglomerate. A failure to readjust its operating structure and sell certain businesses to acquire new, higher-growth alternatives could lead to growth stagnation.
This risk is heightened because Halma is a global company. Therefore, management needs to analyse various markets and trends, which can differ significantly across regions.
Managing over-diversification is important because the valuation being so high means the market is likely to be unforgiving of a slowdown in its earnings expansion.
Strengths outweigh the risks?
Despite the potential drawbacks here, I reckon this tech investment is one of the strongest in Britain. It’s supported by a robust history of financial success. Its record profits for 21 consecutive years, as well as plentiful free cash flow generation, make me bullish.
It’s still not got extremely high future growth prospects. As I’m not looking for a slow and stable investment at this time, I’m not investing in it right now. There are simply too many better high-growth shares in overseas companies I want to purchase first.
