Questor: Further FTSE 100 outperformance lies ahead for this maker of household names

Questor share tip: keep buying into its strong financial position and clear competitive advantage

Haleon’s latest half-year results were highly encouraging, but not necessarily for the reasons that investors assume. 
Certainly, the consumer healthcare company and owner of popular brands such as Aquafresh, Centrum and Panadol delivered a solid financial performance during the period. For example, its organic revenue growth (which excludes the impact of acquisitions) amounted to 3.5pc, while operating profits rose by 11pc versus the same period of the prior year. Its major brands, meanwhile, generated organic sales growth of 5.6pc during the six-month period. 
Furthermore, its upbeat financial performance led to an upgrade in profit guidance for the full year. It now expects to generate high-single digit growth in operating profits. Previously, it anticipated that they would increase at a faster pace than organic revenue, which is still set to rise by 4-6pc. 
While all of this is undoubtedly encouraging and is likely to have buoyed investor sentiment towards the firm, two other figures in Haleon’s first-half results stood out to a far greater extent than sales, profit growth or short-term financial guidance in this column’s view.
The first is the fact that the firm was able to grow its operating profit margin by 160 basis points so that it now stands at 22.7pc. Its capacity to raise prices amid a somewhat uncertain period across many of its key markets suggests that it has a clear competitive advantage over its peers. This bodes well for its financial prospects during both upbeat and downbeat operating conditions.
The second is that 69pc of its brands either maintained or gained market share during the first six months of the year. This is up on the 58pc figure recorded in its latest full year and is highly encouraging for the company’s long-term prospects. It means that it is in a strong position to capitalise on an improving outlook for consumers.
Indeed, demand for the company’s wide range of products is set to grow as a protracted period of elevated inflation and restrictive monetary policy gradually comes to an end. Lower inflation should mean that pressure on disposable incomes finally abates, thereby providing consumers with greater purchasing power. And while interest rate cuts will take many months to have their full impact on the global economy, they are set to provide an increasingly upbeat market backdrop for consumer-focused firms.
Separately, Haleon continued to reshape its portfolio of brands during the first half of the year. For example, it disposed of its ChapStick brand and agreed to sell its nicotine replacement therapy business outside of the US as it seeks to simplify its operations and focus on core brands. It plans to use at least part of the proceeds from recent disposals to reduce debt levels, although its balance sheet is already sufficiently robust in this column’s view.
For example, its net debt-to-equity ratio amounted to a relatively modest 50pc at the end of the first half of its current financial year. Net interest cover, meanwhile, was in excess of seven in the first six months of the year. This suggests that the firm is sufficiently sound to overcome potential economic challenges over the short run that could have a negative impact on its profitability. And with a £500m share buyback programme yet to be completed, the company’s share price prospects are upbeat.
Its past performance has also been highly positive. Since Questor first advised readers to buy Haleon in December 2022, it has produced a 25pc capital gain. This is around 13 percentage points ahead of the FTSE 100 index’s rise over the same period. And while the stock currently trades on a rather heady price-to-earnings ratio of 21.7, an improving long-term operating environment means it has further room to run.
Therefore, Questor retains its view that the stock is worth buying. As ever, our focus is on company fundamentals that can have a huge impact on long-term performance, rather than sales or profit growth over a relatively short time period. In this regard, Haleon scores very favourably due to its strong financial position and clear competitive advantage. 
On a risk/reward basis, it continues to have significant appeal and offers the prospect of further index outperformance. Keep buying.
Questor says: buyTicker: HLNShare price at close: 382.3p
Read the latest Questor column on telegraph.co.uk every Sunday, Monday, Tuesday, Wednesday and Thursday from 8pm.
Read Questor’s rules of investment before you follow our tips.