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Five reasons to be bullish on CSL
It’s been a relatively difficult two years for market darling CSL Limited (ASX: CSL). Plasma collections initially fell off a cliff due to COVID-19-induced lockdowns. Then, ongoing government stimulus slowed the return of donation centres, impacting supply and margins. As a result, FY22 is expected to be a rare down year despite elevated vaccine demand from its Seqirus division.
Recent market volatility stemming from interest rate rises, inflation and a looming global recession also hasn’t helped sentiment. As a result, the CSL share price has been stuck in a trading range between $250 to $310 since 2020. Despite the lacklustre recent performance, here are five reasons to be bullish on CSL.
While the afore-mentioned volatility has markets freaking out over the smallest hiccup, CSL is well-positioned to weather the storm. It’s already banked 80 per cent of its FY22 earnings guidance in the first half. Near-term earnings will be supported by plasma collections – a key input for 70 per cent of its treatments including immunoglobulins and haemophilia – returning to pre-pandemic levels. Management flagged that the second half will be a weaker reporting period, however there is potential for CSL to surprise on the upside.
As for inflation, CSL is relatively immune to cost pressures. The company’s treatments and vaccines are non-discretionary purchases. Gross margins are a healthy 56 per cent, with inflation passed through via price rises.
Over the medium term, CSL will continue to benefit from growth in its existing treatment portfolio. The immunoglobulin market is forecasted to grow by 7.5 per cent while COVID-19 has re-emphasised the importance of vaccines in protecting against easily transmissible viruses such as the flu.
Growth will also be aided by the addition of Vifor and its portfolio of renal disease and iron deficiency treatments. As the world ages and becomes more obese, occurrences of kidney issues and dialysis are expected to rise materially. CSL will use its extensive manufacturing, distribution and scale to take to capture this opportunity with management expecting a 12-15 per cent uptick in earnings growth.
The acquisition is likely weighing on current investor sentiment. However, any concern should be alleviated by CSL’s prior success in extracting value from purchases. It acquired Aventis Behring in 2003 to become the world’s largest plasma product manufacturer. In 2015 it acquired the influenza division of Novartis to create the second-largest global vaccine company.
CSL will also acquired Vifor’s product pipeline, adding to an already extensive suite of new products to spur future growth. CSL spends $1.2 billion on research and development every year, with that number expected to grow.
Subsequently, investors should look forward to high-single-digit earnings revenue and earnings growth over the medium term as CSL rides the health tailwinds and an expanded product pipeline.
Analysts remain positive on CSL, with the lowest price target of $295 per share. Aggregating analyst estimates imply a 15 per cent upside to the current price. Citibank noted prices for immunoglobulin products are on the up. Meanwhile, Macquarie likes the outlook for global plasma supply and demand.
The one notable bear case for CSL is the valuation. It benefited enormously from multiple expansion in the 2010s when its average price-to-earnings (P/E) multiple went from 17 to over 40. It’s unlikely this occurs again. Bulls will point out that it will always be expensive compared to peers given its growth profile. Nonetheless, at current prices, CSL trades on a P/E of 36 leaving only a small margin of safety should the market continue to sell-off growth companies.
In summary, potential earnings upside, inflation protection, a return to normalised plasma collections, several growth levers and positive analyst coverage are five reasons to be bullish on CSL going forward. But keep note it remains priced like a market darling, with potential downside as interest rates rise.
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