CSL--losing my religion
CSL FH24—Losing My Religion
Part of my top 10 holdings series
First a bit of history on CSL. Around 2001 the IG market
went into meltdown, all players suffered as oversupply tipped the market bringing
low IG prices. The market then consolidated with CSL playing a major part in taking
out Behring. Since then, supply has been rational. Demand unexpectedly increased
driven by extra usage and new indications. These tight s/d conditions built a
hugely successful business. Secondly, what did CSL do with all that cash? Allocated
it wisely through R&D largely built on using the excess plasma supplies to
create high-margin specialised products. The much-vaunted last litre economics.
For many years CSL built on these favourable market conditions
and spent wisely to perpetuate more growth.
Where does that leave us now? There have been two significant
acquisitions, Seqirus and Vifor. The IG market remains one of the best you
could wish for, despite the C19 poleaxing, while the R&D pipeline continues
to attract capital.
Behring
The company states that it expects to get too pre-C19
margins. That is a big call, taking it at face value and according to my
calculations, plus market growth, it, for the most part, underwrites CSL profit
growth for the next 3-5 years. I assume some slowing from historic growth rates
due to the bigger base effect, but it still generates meaningful profit growth.
The R&D pipeline has historically delivered the surprise.
I would like to see the ROI of the R&D investment over the last 10 years, I
suspect it would be enormous. The pipeline does not look as strong as it has
been before. Especially with CSL112 out. This will manifest itself through lower
growth and lower ROI. CSL had a purple patch during the last two decades, I struggle
to think of a huge disaster, even CSL112 couldn’t be put in that category, just
disappointing. What this means is lower returns than we have seen historically.
Specialty products have overachieved, imo, over its history but I see fewer
opportunities to drive strong growth now.
Seqirus
The flu business was a successful turnaround and I view it
as a lower-growth cash cow for CSL. I don’t expect the large growth prospects
we see in Behring.
Vifor
A new business and CSL’s largest acquisition. The business
comes with its issues and although I like that they have entered a field not
attracting capital like weight loss or oncology. However, it faces patent
expiry that was known when acquired and the Vifor culture appears to be quite
different to CSL. Unfortunately, I think management is going to need some work
to approach CSL standards. Returns, I fear, will lag and already CSL is
watering down expectations for this business.
In the Australian market, CSL has a reputation that although
deserved from historic performance possibly faces a more difficult and riskier
future. That could test the widely held view that CSL walks on water. I point
to the following, the R&D pipeline that historically added the cream to
returns is thinner than before, Behring must return to strong margins, although
I think a recovery will occur, CSL is overly reliant on this achievement, Vifor
looks to be a battle and Seqirus can't move the dial.
Putting this all together, the higher risk that CSL now runs
will likely be reflected in a lower multiple. I see good earnings growth but as
I said before this all hinges on Behring regaining pre-C19 margins and the company
has a slew of strategies to get there that I won't repeat here, there are many
moving parts to this recovery.
In terms of valuation, I see CSL struggling to keep its
historic PE of mid 30s, although eps growth of 11% cagr for 5 years that I come
up with is good, it is still higher risk, so means lower PE. That is not a disaster,
at $305, and assuming a 25X PE, I find CSL offering similar returns to a raft of
growth stocks, REA CAR etc. however with more to do to get there. Probably
means a lower weight.
Please pull apart this thesis.
Disc Held Ave Cost $264
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