Halma still has to earn its price

The Investment Column
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The Independent Online
Halma is the growth stock par excellence and perhaps the biggest conglomerate that no one has ever heard of. After 25 years of earnings growth in excess of 20 per cent a year, it is now valued at almost pounds 500m and anyone fortunate enough to have invested in the company's early stock market days in the 1970s would be sitting on a truly gargantuan profit.

If you had put pounds 10,000 into Halma in 1974 it would now be worth more than pounds 4m, even disregarding the benefit of a steadily rising flow of dividends. It is a story of relentless growth, partly fuelled by acquisitions, but mainly by a strict attention to improving margins and return on capital at the group's dozens of environmental control, fire and gas detection and safety and security businesses.

The good news continued yesterday with profits of pounds 33.6m, a 15 per cent rise, representing another record performance. Earnings per share also rose 15 per cent to 8.58p after a 13 per cent rise in sales. After very strong cash flow, net cash at the end of the year to March increased to a new record of pounds 19m, net assets were 21 per cent better at 28.9p and the dividend jumped a healthy 20 per cent to 2.56p a share.

Other performance measures all moved in the right direction. The return on sales at 19.4 per cent has shown a steady rise from 16.1 per cent in 1991 and return on capital of 43 per cent is both impressive and rising as the chart shows.

All good news for the share price, you would have thought. Not a bit of it; the shares slipped 7p, or 4 per cent to 174p yesterday as the market, which has learnt to expect better-than-expected results, realised it had slightly overcooked its forecasts. The shares, despite their long-term success, have actually underperformed the market for a couple of years.

Which only goes to show that there is a price for everything and Halma's rose to a pretty demanding level two years back when its price/earnings ratio rose to the high 20s. The shares have since sat back and waited for earnings to catch up, which they have duly done.

The questions facing investors now are the extent to which earnings growth may be losing its head of steam and what price it is appropriate to put on that growth.

On the basis of forecast profits of about pounds 39m in the year to next March, giving earnings per share of 9.8p, earnings growth appears to have settled in the mid-teens. At 174p, the shares stand on a prospective p/e of 18, which looks quite full given the more subdued growth prospects. There is plenty of room to continue increasing the dividend but with a low yield that is unlikely to provide much support. A great company, but the shares are high enough.