CSL – CSL Limited

CSL Limited (ASX:CSL) is a global, biopharmaceutical company that develops, manufactures and markets therapies to treat and prevent serious human disease.

Headquartered in Australia with significant operations in the United States of America, Germany and Switzerland, CSL employs over 11,000 staff and operates in more than 20 countries.

CSL has a combined heritage of outstanding contribution to medicine and human health with more than 90 years experience in the development and manufacture of vaccines and blood plasma protein biotherapies.

CSL’s main areas of expertise include:

1. Plasma products that produce a wide range of life-saving medicines
– CSL Plasma operates one of the world’s largest plasma collection networks.
– CSL Behring is a global provider of plasma-derived products.
– CSL Biotherapies is the chosen national blood fractionator (ie separator) in a number of Asia-Pacific countries.

2. Vaccines and Pharmaceuticals
– Influenza vaccine production which is distributed globally.
– CSL Biotherapies also distribute a range of vaccines and antivenoms in Australia and New Zealand.

3. Research & Development of new medicines for treating serious human disease

Does this business have a sustainable competitive advantage?
One of CSL’s competitive advantages comes from their large collection network primarily in the USA.  In the USA, it is more common for the lower income demographic to donate blood for money.  Once collected, CSL than convert the donated blood into their life saving medicines.  CSL Behring for instance has derived significant global growth and profits as a result.

A second competitive advantage is CSL’s significant scale which enables it to operate with lower costs in comparison to its competition.  CSL effectively dominates the supply of its product which gives it a pricing power advantage too.

An opportunity more so than a competitive advantage comes from anticipated sales growth in emerging markets such China, Brazil and Russia.

What are the risks facing this business?
The obvious risk comes from the potential for a quality assurance mishap with one of their products.

Being a global company, a second risk comes from changes to the regulatory environment in certain jurisdictions.  The company has presented recently that they have worked with the US authorities and achieved some positive outcomes with legislation.

Is it run by able and trustworthy management?
The company’s CEO and Managing Director, Dr Brian McNamee has been in the role for over 20 years and to date has been the company’s sole senior executive since listing on the ASX.  Management has done an amazing job in growing this business from a smallish government department into the beast of a business the company is today.

CSL have announced that a succession plan is in place for Dr McNamee to step down in his role in the next six months.  Dr McNamee will be replaced by Mr Paul Perreault who is currently the CEO of CSL Behring.  Succession to the top job from within is always a good sign and shows that corporate culture will remain on a similar path.

In October 2012, the company announced a second successive $900 million share buyback program (and their 6th capital management program since 2005). While the current program will buy back about 4% of the company’s shares, it significantly boosts the 2014FY forecast return on equity from 32% to 51%.  A 51% return on equity for a business of this size is virtually unheard of.

Is it trading at a bargain price?
CSL has got ahead of itself recently but is arguably still good value for those taking a longer term (2014) time frame with their investments.

Company Code Rank 2012 Actual Valuation Today’s Share Price Margin of Safety 2013 Forecast Valuation 2014 Forecast Valuation 2015 Forecast Valuation
CSL Limited CSL Gold 1 $25.31 $54.52 -38% $39.56 $65.29 $65.17

*Please note that forecast estimates of intrinsic value are subject to change on a daily/weekly basis.

My teenage kids laugh at me for referring to some stock charts as ‘sexy’.  CSL’s chart this year has certainly been that.

In summary, CSL is a global leader in life saving biopharmaceutical space.  The company has great management and it produces excellent cash flow consistent with net profit.  It has a strong balance sheet courtesy of regular capital management activities and has the potential for future growth.  The share price is expensive at the moment however the company has a growing earnings profile for the foreseeable future.

This article is published by Dean Mico.

Disclosure: Dean Mico owns shares in CSL Limited.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

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