Amidst the post-earnings corporate AGM season, one of the best companies in Australia today (which funnily enough was spun out of government funded research….) – CSL Limited – announced an improved profit outlook:
CSL Limited (ASX:CSL) today announced a revised US Dollar profit outlook for fiscal 2013. The Company now expects net profit after tax to grow by approximately 20% at constant currency, despite competitive business conditions.
In August this year the Company reported a net profit after tax of US$1,024m and provided guidance that it expected profit to grow approximately 12% during fiscal 2013. Today’s revised outlook has been issued immediately following a newly compiled financial forecast.
Dr Brian McNamee, CSL’s Managing Director, said “I am pleased to report an improved company outlook for the financial year, largely underpinned by the performance of CSL Behring. A number of factors have contributed including a higher level of sales, a better sales mix and improved efficiencies across the supply chain. Also contributing to the better outlook is higher than anticipated royalty income from sales of GARDASIL®.
We have covered CSL several times at Macro Investor, due to its status as a “Core” quality stock and as major holding in our recommended portfolio, with a “Buy” signal generated in mid-March (before launch) and a “Hold” signal in early June (before launch).
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CSL remains at the top of our list of stocks to buy on any correction or dip in market sentiment, but today this result has sent the stock price soaring 6% to over $50 per share:
And here’s the updated valuation chart, with FY13 and FY14 estimates of value raised several dollars per share:
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That CSL has been able to generate excellent results with a stubbornly high USD is testament to a very well run corporate structure, providing excellent products with high demand. The company still faces large regulatory risks and a need to pour capital into ongoing research and development to maintain its competitive edge, but has a robust future ahead, even if the AUD does not fall below parity. Unlike other industrials in Australia, CSL has been able to offset this massive currency risk due to its global reach.
Isn’t it a pity we don’t have more CSL’s and Cochlears, companies that create real value for shareholders and the nation’s long term future, instead of those that are one-trick ponies with one customer?
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Here’s the report we completed at Macro Investor in late October:
CSL remains at the very top of our shopping list, not just in large caps, but for the entire ASX200.
Since our “Hold” recommendation in July, this healthcare stock has appreciated over 20%.
With a “Core” rating, CSL will benefit from a lower AUD and investor rotation into the sector.
CSL Limited (CSL) is a leading pharmaceutical and healthcare product provider with a global reach and a dominant member of the healthcare sector. It develops, manufactures and distributes paediatric and adult vaccines, infection and pain medicine, anti-venoms and immunoglobins.
Financials and Management
Since our initial review in July, CSL has reported its results to the market and recently announced a further buyback of up to $900 million, or 4% of its shares on issue. There were no real surprises with this otherwise superlative company extending its history of maintaining a very high Return on Equity (ROE) ratio and very good capital management, providing shareholders with excellent returns on their capital.
A very low dividend yield, with almost zero franking, belies the nature of this growth stock however, as dividends have grown on average 19% each year in the last five years. Although this has tapered recently, the dividend payout ratio has been rising. With earnings expectations rising to 226 cents per share next financial year, building to 311 cents in FY16, the scope for further dividends has increased.
Allocation
The market condition for CSL is an outright bull market, the share price accelerating in recent months on the back of sector rotation, its share buyback program and solid earnings.
FARM is maintaining its “Hold” signal and is approaching “Take Profit” levels. However, the current share price is at this year’s estimate of value and still well below FY14 and beyond estimates, giving some margin of safety. We would nonetheless only consider further allocation, up to 5.5% of portfolio, on a pullback in price to $40 per share.
Macro and Risk
The risks facing CSL continue to be regulatory and competitive. Other risks include the constant high capital expenditure costs to maintain the edge in developing new products. Balance sheet and earnings risks are minimal, with zero net debt.The recent trend of a sector rotation into health and defensive stocks, from materials, industrial and consumer discretionary sectors, may be coming to an end, as the lower AUD and QE3 lift risk moods.
However, the positive driver of a major demographic shift of the developed economy baby boomer cohort and the emerging middle class from developing economies remain structural even with a move by State and Federal governments slashing costs.
The bottom line: On the event of a pull-back in its share price, CSL remains at the very top of our list of potential buys though for now FARM only recommends a Hold at between 2.7% and 5.5% of portfolio. The company is financially strong, cyclically resilient, structurally robust and well priced to estimates of long-term value. We will continue to watch it closely.
