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 MARKET REPORTS |
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Stocks
Stock of the week – CSL
October 6, 2008
Tim Morris, wise-owl.com analyst
Company: CSL Ltd
Code: CSL
Recommendation: Update
Market Cap: $22.8billion
Following Wall Street’s 7% plunge during the week, panicked investors have been clamoring for safe places to park their money. Others focused on long-term opportunity rather than fear, and have been buying up shares of quality blue chip companies unfairly punished amid the turmoil. Such long-term value opportunities have been cropping up here, there, and everywhere. Often high dividend yields are a big part of these value propositions. Some of our recent blue chip bargain picks already yield in excess of the cash rate, and with local interest rate pressures growing on the downside, we expect this yield appeal to increase in the months ahead, as returns on cash accounts creep lower.
With value opportunities dominating the market in recent months it has been easy to forget the other broad style of investing – growth. While value investing typically focuses on buying stocks when they’re out of favour, and below some form of intrinsic benchmark valuation (i.e. historical average PE, net tangible assets), growth investing focuses on buying stocks likely to experience a strong increase in earnings. Assuming that the original price paid for the stock is reasonable, the earnings growth should, in theory, lift the value of the company and the share price.
CSL is a growth stock with unique defensive characteristics. For the uninitiated, CSL 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, which had made it clear that Australia cannot afford to rely on overseas supplies of important bacteriological and vaccines.
Since going public in 1991 the company has become a leader in the $7.5bn blood plasma market. Blood plasma is the liquid component of blood which transports blood cells and hormones throughout the body. It is 90%, but contains valuable nutrients and proteins including immunoglobulins (aka antibodies), which are responsible for much of the body's defense against infection.
There are many therapeutic products that can be derived from blood plasma, but for most of CSL’s major sales drivers, it holds a top 3 market position. These dominant market positions provide strong pricing power, which can be used to offset downturns in demand. However, unlike many other sectors of the global economy, the health care markets in which CSL operates are relatively insulated from such events. While a slowing economy may prompt us to hold back from purchasing a plasma TV, it is unlikely to stop us from demanding that critical blood plasma product should we run into ill health.
Showing no signs of ill health is the company’s latest financial results to June 30, with revenue growing 15% to $3.8bn and net profit up 30% to $702m. The result could have been even better, although adverse currency movements decreased profits by $78m. The company’s international (Behring) and local (Bioplasma) blood plasma divisions remain the key earnings drivers, together accounting for 80% of revenues.
With year on year earnings from these divisions growing 8%, the main driver of the company’s bottom line during FY08 came from vaccine and pharmaceutical businesses. Falling under the ‘CSL Biotherapies’ umbrella, this division manufactures and provides influenza vaccine globally, and the much-hyped cervical cancer vaccine, GARDASIL –the primary driver of the division’s 52% lift in sales during FY08.
This latest result reaffirms the company’s status as a ‘growth stock’ and sees it trading on a current PE of 29, and a forward PE of 24. The big premium to the rest of the market reflects the company’s strong growth prospects from its vaccine division, and the defensive nature of its dominant blood plasma operations. Gearing remains at conservative levels, with debt to equity at 33% and interest cover of 19 times.
With the underlying business remaining sound, the key risk to the share price is the stock’s valuation premium, which could be de-rated purely by sentiment. In a bear market sentiment is a fickle thing, however we are encouraged by its performance to date in the face of the dramatic turmoil which has rocked the market. Posting a flat return compared to the 28% slump in the ASX200 since November last year – the stock has yet to be fazed by the credit crunch gripping almost every other listed company. Therefore in light of the resilience to date, its strong recent profit result and the quality of its underlying business, we have recommended that our members continue holding the stock.
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:
Investing: As stocks hit lows, when is the right time to jump back in?
Share tips: Broker Stock Recommendations 6 October – 6 to BUY, 6 to SELL and 6 to HOLD
Stocks: Stock of the week – CSL
Acquisition: Suncorp confirms acquisition interest
German Bailout: Rescue package agreed for German bank
Survey: Job ads growth at five year low
Markets: Investors expect market volatility
Recession: Bill Gates plays down recession fears
Currency: Australian dollar hits two-year low
Joint venture: OZ Minerals withdraws from Terramin JV
Lehman brothers: JPMorgan blamed for Lehman collapse
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