Halma (LSE:HLMA) has been one of my top FTSE 100 growth shares for some time. But the stock crashed 14% on Thursday (11 June) after the firm released its full-year earnings.
Is this my opportunity? Or has something gone badly wrong with one of the UK’s top long-term compounders of the last 10 years?
What’s happened?
Halma’s full-year update reported 16.6% organic revenue growth. And – as I predicted – it’s been a good year for the photonics division.
This sells equipment to data centres, where demand has obviously been huge. As a result, this part of the business grew 52%.
Seeing this coming wasn’t especially hard work. Diploma – another FTSE 100 company – posted largely similar results recently.
The thing is, investors cheered Diploma’s announcement like it was a hero. But the reaction to Halma has been quite different.
Apparently, when Diploma sells to data centres, it’s a masterclass. When Halma does it, it’s a cyclical tightrope walk.
Is that right? Or is the market’s asymmetric reaction a huge opportunity for me to buy a stock I’ve had my eye on for a while?
What’s not to like?
Investors reacted negatively to Halma’s news for two reasons. The first is concentration.
The firm revealed that its photonics business sells to a single data centre customer. And that makes up around 20% of its entire revenue.
It also accounted for around half of the total organic growth. So growth elsewhere in the business was pretty modest.
| Division | Organic Growth |
|---|---|
| Safety | 5.9% |
| Environmental & Analysis | 33.60% |
| Healthcare | 4.90% |
The other issue is cyclicality. Management warned that photonics growth is likely to slow to 30% next year. That’s still a lot, but it’s lower.
Diploma’s report didn’t announce either of these issues. The demand issue, however, is likely to be the same for both companies.
The concentration risk is real. But investors shouldn’t forget where this apparent problem has come from.
Long-term strength
Halma acquired Avo Photonics in 2011 at a modest price when it was a tiny fraction of its current size. And that move has worked out spectacularly.
It reminds me a bit of Warren Buffett’s Apple investment. That worked out so well that it came to dominate Berkshire Hathaway’s portfolio.
Investors should want Halma to do deals like this so what they should hope for is more of the same.
There are positive signs on this front. In the last year, the firm invested a record £447m and two more have been completed since the end of the year.
That’s a key long-term strength for Halma. It’s a big part of why the stock has been such a good investment over the last 10 years.
This isn’t to say investors should ignore the concentration risk. But they should remember why it’s come about.
Is this my opportunity?
Halma is a stock I’ve had on my radar for some time. And the full-year results were almost exactly what I anticipated.
I saw Diploma’s report last month and expected Halma’s to be similar. What I didn’t predict was the stock market’s reaction.
I’m not convinced that Halma and Diploma are as different as investors imagine. So I’m going to take another look at the stock in the next few days.
Should you invest £5,000 in Halma Plc right now?
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Stephen Wright owns shares in Apple and Berkshire Hathaway.
