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 MARKET REPORTS |
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Stock Picks
Stock of the Week – CSL Ltd
May 26, 2008
Tim Morris, wise-owl.com analyst
Company: CSL Ltd
Code: CSL
Market Cap: $22.23bn
Recommendation: Buy
CSL Ltd is one of the nation’s leading health care innovators, renowned around the globe for its life saving medical products and cutting edge Research & Development (R&D). The company’s origins date back to 1916, when The Commonwealth Serum Laboratories (CSL) was established in Australia to service the health needs of a nation isolated by war. This had made it clear that Australia cannot afford to rely on overseas supplies of important bacteriological and vaccines.
CSL Limited was incorporated as a public company in 1991 and listed on the Australian Stock Exchange in 1994. The success of the company since this time is portrayed by just one glance at CSL’s share price chart, which shows the stock rising from just 80c to current levels around $40 over the last 14 years.
The company’s three core business areas now include plasma products, vaccines & pharmaceuticals, and pure R&D. Human blood plasma is used to produce a wide range of life-saving medicines, and CSL engages in the collection and testing of donated plasma through to the production of a range of plasma-derived products. Within the Asia Pacific, the company’s plasma operations fall under the guise of ‘CSL Bioplasma’, whilst ‘CSL Behring’ services the rest of the global market.
A great deal of CSL’s revenue is derived from CSL Behring division. This division enjoys a strong position in the global plasma market, which is estimated to be worth US$7.5bn per year. It is the 2nd largest player in the coagulation market with a 20% share, the largest player in critical care (35% market share), the 2nd largest player in the immunoglobulin market (20% share), and the 3rd largest player in the Alpha-1-Pl market (8% share). 33% of revenue is derived from immunology and 22% from plasma-derived coagulants. There continues to be strong demand for blood plasma products and CSL’s dominant market position provides strong pricing power. The company has recently managed to increase operating margins through improved manufacturing and increased logistics planning.
CSL manufactures vaccines & pharmaceuticals under the ‘CSL Biotherapies’ umbrella. This division manufactures and provides influenza vaccine globally, and the much hyped cervical cancer vaccine known as GARDASIL. Each of these products are expected to be key earnings drivers moving forward. These breakthrough drugs would not be possible without a commitment to R&D. R&D investment during the current year is forecast to be 220m, up from $191m last year, which consumed around 6% of sales.
Revenues during FY07 were $3.2bn, almost 90% of which was derived from the blood plasma divisions. Normalised net profit was $521, 48% higher than the previous year. The momentum remained swift during the last half year period to December, with revenue rising 20% to $1.9bn and net profit up 36% to $349m.
This recent track record and ongoing growth prospects are reflected in the stock’s large valuation premium to the rest of the market. CSL’s current forward PE stands at 31.55, compared to the broader market average of around 15. However, this premium also reflects the defensive nature of earnings in the health care sector and the blood plasma industry’s high barriers to entry.
Key risks to earnings include the strong Aussie Dollar. 87% of earnings are sourced offshore, mainly from Europe and the US. Therefore a higher local currency reduces their value when converted for reporting purposes. Over the long term, use of the company’s R&D budget is another risk, as failure to develop new ground breaking products could dampen CSL’s earnings growth prospects.
A slow down in earnings could result in a large share price fall to bring the stock’s valuation premium in line with the rest of the market. However the outlook remains robust given CSL’s strong product pipeline and market position. In our view, if the stock was going to be de rated on the valuation front we would have already witnessed it during the recent market turmoil at the start of the year. Take one glance at the share price chart and compare it the ASX200 if you’re not sure what I mean. In light of this favourable industry outlook, strong market position, and share price resilience during testing times, we are buyers at current levels for ongoing growth.
Tim Morris is an analyst at wise-owl.com, one of Australia's leading independent stockmarket research houses. Click here for your complimentary report.
Please note that CompareShares.com.au simply publishes analyst reports on this page. The publication of these reports does not in any way constitute a recommendation on the part of CompareShares.com.au. You should seek professional advice before making any investment decisions.
More articles from this edition of CompareShares:
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Investing: Energy Stocks – Buy or Sell
Stock Picks: Stock of the Week – CSL Ltd
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Companies: IAG boss Michael Hawker resigns
Commodities: All eyes on oil as price surge continues
Economy: Buffett says US is already in recession
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