Will the Haleon share price hit £2 or £4 first?

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Although you may never have heard of Haleon (LSE: HLN), you will likely be familiar with at least some of its products. The company owns brands such as Sensodyne and Panadol. But while those brands have been around for decades, Haleon was only formed this year when it was split off from GlaxoSmithKline. The initial Haleon share price was £3.30. As I write this it is trading around £3.14.

Where will the shares go from here – and should I buy them for my portfolio?

How to value Haleon

One of the challenges of a brand new company is knowing how to value it. Even though the business has been around for a while, it has been an integral part of GSK. Looking at the past breakdown of GSK’s performance by unit can help to some extent. But it will not give the full picture.

The point of breaking a business into two companies like this is to allow both to do what they do best. So, Haleon may end up doing better with the same assets than GSK did, because it has more focus. On the other hand, no longer being part of a larger organisation could saddle Haleon with higher costs as a percentage of sales than expected. That may mean profit margins are lower than when it was a division of GSK.

Once the company has a couple of results statements under its belt, it should be easier to understand the economics of Haleon as a standalone enterprise. Until then, I think it is difficult to attach a valuation to the company.

What the Haleon share price indicates

Having said that, the share price is still a useful piece of information for investors.

It values the company at £29bn. Earlier this year, GSK management rejected a £50bn bid for the business from Unilever. It said that the bid “fundamentally undervalued” the business.

I have little confidence in GSK’s management and think they missed a golden opportunity. But whether or not the bid undervalued the company, it was at a far higher level than today’s Haleon market capitalisation. If a sophisticated rival with industry experience such as Unilever was willing to stump up £50bn for the business, I would be surprised if it was worth only around £30bn as its current capitalisation suggests.

The role of Haleon in my portfolio

If the real value of Haleon is anywhere close to Unilever’s offer, I would expect the shares to move up from their current price in the long term.

On that basis, I reckon the Haleon share price might hit £4 before it hits £2. That could be especially true if trading as a standalone business is stronger than expected. But there are risks that could push the price down. Cost inflation might squeeze profit margins, for example. Although I am currently optimistic about the potential for the Haleon share price, I will not consider adding it to my portfolio at least until it publishes its first results as a standalone company.

The post Will the Haleon share price hit £2 or £4 first? appeared first on The Motley Fool UK.

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Christopher Ruane owns shares in Unilever. The Motley Fool UK has recommended GlaxoSmithKline and Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.