Can Haleon turn strong margins into stronger growth? Jefferies weighs in

Haleon's first-half 2026 operating margin expansion outpaced expectations by 70 basis points, a feat driven by cost-saving measures. However, the company's organic sales growth of 2.6% has sparked questions about whether Haleon is investing enough to spur growth, as noted by Jefferies in a recent report. The brokerage firm, which maintains a "buy" rating on Haleon, acknowledged the impressive execution of cost savings but also highlighted lingering concerns over competitiveness and growth investment.

Gross margins expanded by 140 basis points, largely due to productivity gains, which funded a 3.2% rise in advertising and promotion (A&P). Operating margins showcased a significant 160-basis-point increase, reaching 24.3%. Organic sales growth in the second quarter came in at 3.1%, a mix of 1.7% price growth and 1.4% volume/mix growth.

The company reported a clean second quarter, outpacing initial forecasts. Growth in oral health rose by 6.2%, pain relief accelerated to 4.6%, and digestive health expanded by 5.5%. Conversely, respiratory sales saw a decline of 6.5% owing to a weak cold-and-flu season in key markets like the US, Central and Eastern Europe, and China.

This downturn is anticipated to reverse from the third quarter onwards. North America's sales rebounded to 3.1% growth, up from 1% in the first quarter, suggesting that the management-led reset is proving effective. Emerging markets contributed to growth at 6.3%, while Europe experienced a slight contraction of 0.4%. Jefferies has set a target for Haleon to achieve 5%+ growth in the second half of the year to hit the midpoint of its full-year guidance, with first-half organic sales growth (OSG) currently at 2.6%.

The firm forecasts 2026 sales of £11.45 billion, slightly above the Visible Alpha consensus of £11.39 billion, with OSG at 3.7% compared to the 3.5% consensus. For 2027, Jefferies projects sales of £11.97 billion, 0.8% higher than the consensus, with OSG of 5.1% versus the 4.5% consensus. The broker's 2026 earnings-per-share (EPS) estimate of 21.11 pence is 0.5% above the consensus, rising to 22.64 pence in 2027.

Jefferies cautioned that the anticipated growth acceleration may not materialize, emphasizing that the impressive 160-basis-point first-half margin expansion came with only a modest 3% increase in A&P. This could reignite the debate over over-earnings and potentially weaken confidence in Haleon's sales framework. The broker also corrected a previous miscalculation regarding dividend payouts versus share buyback levels, lowering its 2027 EPS estimate by 4.5%.

Jefferies maintained an improved price target of 410 pence on Haleon, up from 400 pence, representing a 2% increase and suggesting a 13% upside from the previous close of 363.10 pence. The broker expressed confidence in its forecasts, citing a 16 times forward price-to-earnings ratio and the potential for growth and margin delivery to push the stock to 17.5 times forward earnings.