You Can Stop Looking, Here's the Perfect Stock for the Current Market

The over-the-counter medicine business is proving to be a lucrative one. And it’s one that is doing well in the current environment of a gradually slowing economy.

Some of the world’s largest pharmaceutical companies - faced with looming patent expirations on some of their best-selling prescription medicines - realized they needed to plow serious money into research and development.

So, in some cases, there was a simple solution: divest the steady, consumer-facing business of selling over-the-counter drugs to fund drug development work.

This is exactly what GSK PLC(GSK) did over two years ago when it demerged the business that now trades as Haleon PLC(HLN). This business was the combination of the OTC products divisions of both GSK and Pfizer (PFE).

Johnson & Johnson(JNJ) followed suit in May 2023, when its own consumer business floated as Kenvue(KVUE). Other drug companies, including France's Sanofi(SNY), are planning to follow a similar path.

GSK shareholders are certainly quite pleased with the Haleon breakup. They received one share of Haleon for every share of GSK held when the demerger was completed on July 22, 2022. Since then, GSK stock is only up slightly, but Haleon is up around 40%.

Let’s take a look at why Haleon continues to do so well.

Haleon’s Simple, But Lucrative Business

Haleon reports revenue for five segments: Oral Health (29% of first half 2024 revenue); Vitamins, Minerals and Supplements (15%); Pain Relief (23%); Respiratory Health (14%); and Digestive Health and Other (19%).

The company’s success is due to its focus on so-called “power brands” – nine large-scale, multinational, high-margin brands that hold leading market shares in growing categories.

Haleon has grown revenue and volumes thanks mostly to its portfolio of power brands, which includes household names such as Sensodyne toothpaste and Advil pain relief. Some other of its well-known brands are Tums, Centrum, Flonase, Theraflu, and Voltaren.

The company generates roughly 60% of its sales from its power brands. Management recently upped its full-year guidance on the back of the 5.6% organic growth rate they achieved in the first half. Sensodyne delivered double-digit growth, as did Centrum vitamins and Parodontax gum health products.

Haleon is benefiting from the fact that shoppers often look for cheaper alternatives when faced with a cost-of-living squeeze. However, they are less likely to compromise when it comes to things such as cold medicine or dental health. Products such as Sensodyne (a specialized toothpaste recommended by dentists and with relatively few competitors) therefore enjoy a degree of protection from macroeconomic headwinds.

HLN Stock is a Buy

Anyone thinking about investing into Haleon should be aware that it currently trades on 21 times consensus earnings for the full year, making it pricier than Kenvue, the world’s largest consumer health company in sales terms, which trades on 18 times its estimated full-year earnings.

Nevertheless, Haleon is a great stock for the current environment we’re in. The resilience of its brands is fueling investors’ interest in HLN — as are fears about a slowing U.S. economy and overvalued technology stocks.

The pure-play consumer health company was among a small handful of stocks trading up amid the recent sell-off in equities. It is up 22% over the past three months, as investors have rotated out of growth stocks and into consumer staples stocks.

Haleon stock had been dogged by fears the company could get caught up in U.S. lawsuits over heartburn drug Zantac’s potential links to cancer. That has weighed on its share price since GSK spun it off in 2022.

There was also an overhang of shares to hold back the stock price. But now, Pfizer has cut its stake by more than a quarter to 23%, while GSK is already out. And Haleon’s stock buyback plan ($655 million) is scooping up some of that overhang from Pfizer.

So now, investors appear increasingly comfortable about the litigation risks, and more willing to focus on Haleon’s solid and steady growth potential. HLN stock also has a dividend yield of 1.54%.

In the medium term, the company expects operating profit to increase in a high-single digit percentage range. It had previously said profit would increase by a higher percentage than sales, which it expects to grow by 4% to 6%. Operating profit margins will grow by 0.8 percentage point to 23.5%. 

Haleon aims to take advantage of emerging secular trends, such as the growing popularity of preventive medicine, and the increasing shift from prescription to over-the-counter meds (self-care), as well as an aging global population. I expect the company to benefit from these tailwinds, supported by its market-leading power brand names.

Haleon should sail through any economic slowdown with flying colors. HLN stock can be bought at the current price of around $10.25 or, at worst, below $10.50.