Halma - Pay Up To Sleep Well At Night

“Defensive” doesn’t always mean “no growth”, and Halma (HLMA.L) (OTCPK:HLMLY) is certainly one of those companies that has built wide moats around its business and managed to maintain a healthy pace of growth through both organic expansion and M&A. Moreover, served markets like gas detection, explosion prevention, fire and elevator safety, ophthalmology, and water safety aren’t the sort of markets where demand just suddenly goes away because the economy turns.

Valuation is, of course, a challenge. Chances to buy Halma shares on the cheap are about as frequent as chances to buy Danaher (DHR) or Roper (ROP) at a discount (and for largely the same reasons), but the stock has at least provided 10% pullbacks on a pretty reliable basis. Trading at over 20x the estimated EBITDA three years forward there is no way Halma is conventionally cheap, but if you can make your peace with the different valuation rules in place here, I think this is a name to consider on a pullback.

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Halma - Pay Up To Sleep Well At Night

Excellent Results Supporting A Steep Valuation At Halma

I really like the businesses at Halma (OTCPK:HLMAF) (HLMA.L), but when I last wrote on the company in January, I thought there wasn't much room for the already-steep multiples (on both an absolute and relative) to expand much further. For a little while that call worked, with the shares losing about 10% of their value between late January and late March, but a positive late March update and renewed enthusiasm for companies exposed to the oil/gas recovery and commercial buildings sparked a big rally that has left the shares about 10% higher than they were back in late January.

I am still a big fan of Halma's business mix and management's strategy to augment its core strengths with selective M&A and greater internal investments in digital capabilities (including IoT and analytics). It's also very easy to like a company that is logging double-digit organic revenue growth and even stronger order growth. The "but" remains valuation; the shares are trading at multiples more than 50% above the company's long-term averages and close to 33% above a peer group of quality growth companies. Given the level of expectations built into the price, I'd rather err on the side of missing more of the run than risk jumping in ahead of even a partial reversion to the mean.

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Excellent Results Supporting A Steep Valuation At Halma

Recovering Markets And Improving Margins Propelling IDEX

Things are pretty good these days at IDEX (IEX). Strong, and persistent, recoveries in markets like agriculture and water and ongoing growth in semiconductors have helped drive strong organic revenue growth, which the company has leveraged into improved margins across its businesses. Free cash flow generation has picked up and the outlook for 2018 is attractive.

The "but", as is the case for most multi-industrials, is valuation. If you believe in buying good companies no matter what the price/valuation and/or you're comfortable with implied returns in the mid-single-digits, maybe IDEX still meets your requirements. I'm less comfortable with valuation, though, and while IDEX is generating good results (and is likely to continue to do so in 2018), I'm not willing to pay such a high apparent price.

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Recovering Markets And Improving Margins Propelling IDEX

Halma's Model Continues To Drive Value For Shareholders

Strong revenue growth and healthy margins remain a heady mix for industrial investors, and Halma (OTCPK:HLMAF) (OTCPK:HLMLY) (HLMA.L) is a good case in point. The market has amply rewarded this diversified European safety, health, and environmental conglomerate for its ongoing growth, with the shares up 25% or so since the last time I wrote.

Halma's model of steadily acquiring leading businesses in defensible niches has a lot of room to run, but it's hard to reconcile what I regard as a very good long-term model with today's valuation. Trading at close to 20x next year's EBITDA, it's hard to argue that this is any sort of overlooked hidden gem at this point.

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Halma's Model Continues To Drive Value For Shareholders

Halma Playing Defense With Some Aggression

Human beings are pretty much driven to categorize, so I don't really blame analysts for trying to categorize companies and their business mixes as "late-cycle" or "defensive", but those designations can sometimes hinder as much as they help. Halma (OTCPK:HLMAF) (HLMA.L) is indeed "defensive" by some metrics, but this is a company that is more than happy to go on the offensive - witness the company's roughly 10% trailing compound revenue growth rate, its double-digit FCF growth rate, its double-digit returns on invested capital, and its preference for redirecting cash flow toward continuous M&A as opposed to sending it back to shareholders.

What's also not so defensive about Halma is the valuation. Trading at around 18x my fiscal 2018 EBITDA estimate, Halma's virtues are not ignored by the Street, though I won't tell you that the low-teens FCF growth baked into the valuation is unreasonable or unattainable.

Investors will note that Halma's ADRs have that dreaded "F" at the end. Although the shares are reasonably liquid in terms of average daily trading volume, the liquidity can be very lumpy, and I would suggest that investors interested in Halma consider buying the London-listed shares.

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Halma Playing Defense With Some Aggression