Seeking Alpha • Aug 31
Haleon: Undervalued With Clear Catalyst Ahead
Summary
Haleon has tumbled 20% since trading began in July.
The stock is undervalued relative to its peers.
The announcement of a dividend should boost the stock to higher levels.
Earlier this year, GSK plc (GSK) decided to focus its business on vaccines and prescription medication. As a result, the company spun-off its consumer health business. The newly created company, Haleon plc (HLN), is now the largest standalone consumer health business. It owns many household brands, including Advil, Emergen-C, Tums and Sensodyne. The company is a powerhouse in the consumer staples industry, with around $11.5 billion in annual sales.
The stock began trading on July 18, 2022, and has been steadily trading lower, down 20% since trading started. This article will focus on the stock's value versus peers as well as a significant catalyst that could lead to the stock finding a floor and climbing higher.
Haleon Fact Sheet
Haleon is Undervalued
Yahoo Finance and CNBC
Anyway, you analyze Haleon, it is undervalued versus its peers in the industry. Comparing Haleon to three of the biggest companies in consumer staples - Procter & Gamble (PG), Unilever (UL, UNLYF), and Kimberly-Clark (KMB) - the company stacks up well on a number of valuation metrics. Its P/E value of 14.6 is 56% below the average P/E ratio of the 3 peers. This also puts the stock at a discount to the broader S&P 500 as well.
Whenever you see a stock trading at a steep discount to its peers, investors should then look at the company's margin and growth level to see if the undervaluation is warranted. Here, you can again see Haleon stacking up very well. The company has an attractive net margin of 15.7%, which is well above Unilever and Kimberly-Clark. Perhaps, more importantly, the company expects its margins to hold up even in today's challenging market environment.
Haleon saw a very strong second quarter revenue growth of 12.9% and organic revenue growth of 7.5%. The organic revenue growth came from a 4% increase in price and improved volumes of 3.5%. This combination shows consumers are willing to pay higher prices to continue to buy Haleon's product lineup in a very competitive market. For the full year FY2022, the company expects organic growth of 6-8% and 4-6% over the following 2 years. This steady growth is exactly what investors want to see and is attractive versus its peers over a 5-year period.
PG Revenue (Annual YoY Growth) data by YCharts
Haleon Underperformance
With Haleon having attractive revenue growth, healthy margins and trading at a discount relative to its peers, why has the stock performed so poorly since its debut? Both the company and the stock are in a transition period. When Haleon was spun-off from GSK, all GSK shareholders received 1 Haleon share for every GSK share they held. 54.5% of Haleon stock was held by GSK shareholders at the time of the spin-off. These investors held GSK for exposure to pharma and not necessarily consumer healthcare. As a result, many of the current GSK shareholders likely sold during the first few weeks as it didn't meet their portfolio needs or sold to raise cash in a very uncertain market.
In addition, shortly after it began trading as a standalone company, news of a growing lawsuit emerged that targeted a probable carcinogen in the popular heartburn drug, Zantac. Zantac was originally formulated and sold by GSK in the 1980s. GSK's patent expired in 1997, and since then numerous pharmaceutical companies have owned the rights to Zantac, including Pfizer (PFE), Sanofi (SNY) and Boehringer Ingelheim. With the first legal proceedings of this lawsuit starting in late August, investors began to fear an outcome similar to that faced by Bayer when they agreed to a $10.9 billion settlement related to lawsuits targeting a link between Roundup and cancer.
However, the lawsuit targeting Zantac is extremely complex due to the drug being sold for nearly 4 decades by numerous different pharma companies. These lawsuits will be locked up in the courts for years to come and has a long way to go before any outcome is even clear. Haleon shares fell over 10% as news of the start of the trial emerged. Haleon issued a statement about the lawsuit where they stated Haleon is not a party to any of the Zantac claims and the company never marketed Zantac in any form in the U.S. Haleon may end up having some exposure to the lawsuit, but it will likely be limited due to the number of other companies involved, and no clear result will be known for years. As a result, the issue should remain on investors' radar, but shouldn't be front of mind or alter investment decisions.
Haleon Catalyst
As I said above, Haleon's stock is in a transition period and in a bit of a no-man's land. It's a newly created consumer healthcare company with plenty of comps, but the biggest difference between it and its peers is the dividend. Currently, Haleon pays no dividend. As a result, it doesn't meet many investor needs or criteria. Mutual funds, pensions, endowments and retail investors are large holders of Procter & Gamble, Unilever and Kimberly-Clark because they are steady businesses during favorable and unfavorable economic conditions that pay a steady dividend. Currently, Haleon doesn't offer this steady income that many investors rely on in their portfolios.
However, the company has stated they intend to start paying a dividend at the lower end of a 30-50% payout ratio. Assuming the company starts its payout ratio at 30% and EPS of 0.42, the initial dividend will likely be around $0.12-$0.13/share. This would give the stock an initial dividend yield around 2% based on its current price around $6/share. This would also give the company plenty of room to accomplish their other objective to get their net debt/EBITDA under 3 by the end of 2024.
