Is it time for me to buy this FTSE 100 investment darling after its strong 2024/25 results?
I am always extremely wary of FTSE 100 stocks that market insiders highly favour â âinvestment darlingâ shares.
As a former market insider myself, I know this clubby hype can lead to extreme overvaluations in stocks. One does not automatically follow the other, but it often does.
A particular sort of firm that attracts this sort of attention in my experience is one that grows by buying other companies.
Halma (LSE: HLMA) is a group of nearly 50 firms that make safety products for the health and environmental sectors. Its model is to identify companies that deliver strong growth, high returns and positive impact in global niche markets.
To find out whether its share valuation has fallen victim to the investment darling curse, I ran some key numbers.
Is it overvalued?
The first part of my standard share price assessment is to compare a stockâs key valuation measures with its competitors.
On the price-to-earnings ratio, Halma currently trades at 39.9. This is top of the group of its peers, which average 29.7 â so it is very overvalued on this basis.
These firms comprise Renishaw at 21.2, Siemens at 21.4, Danaher at 37.2, and Oxford Instruments at 39.
Halma is also very overvalued on the price-to-book ratio at 6.2. This is again top of its peer group â by a very long way â which averages just 2.7.
And it is also very overvalued on its 5.3 price-to-sales ratio â and top of the group — against the 3.2 average of its competitors.
The second part of my assessment is to work out what all these mean in share price terms. This involves running a discounted cash flow (DCF) analysis, using other analystsâ figures and my own. These cash flow forecasts for the underlying business highlight where any firmâs stock price should be.
The DCF analysis for Halma shows its shares are 61% overvalued at their current price of £30.90.
Therefore, their ‘fair value’ is £19.19.
Good results
Analysts forecast that its earnings will increase by 8.9% a year to the end of fiscal year 2027/28. And this looks well-founded based on its fiscal year 2024/25 results released on 12 June.
These saw the 22nd consecutive year of profit growth â up 12% year on year to £411.2m.
Revenue jumped 11% to £2.248bn, while adjusted earnings before interest and taxation rose 15% to £486.3m.
My view
Just because Halma looks overvalued does not mean it is a bad business — quite the contrary, in my view. There is, though, a major risk in the shares as an investment proposition.
I have never â and will never â pay more than fair value for any stock I buy. In fact, most of the shares I have bought over many years are undervalued by at least 30%. And there are many such stocks available right now in the FTSE 100 and FTSE 250 indexes by my reckoning.
It may be that Halmaâs business will eventually grow into its current share price, of course. I just do not want to gamble that it will.
The post Is it time for me to buy this FTSE 100 investment darling after its strong 2024/25 results? appeared first on The Motley Fool UK.
Like buying £1 for 31p
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
More reading
- Halma shares surge on outstanding results. But is there trouble ahead?
- 1 FTSE 100 stock to watch this week
Simon Watkins has no position in any of the shares mentioned. The Motley Fool UK has recommended Halma Plc and Renishaw Plc. 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.
