In this section we place one stock under the microscope and give it the unconventional assessment.
If we all had the benefit of hindsight we would have held CSL (CSL) in our portfolio over the past 10 years and ignored all of their earnings reports. CSL was originally owned by all of us. A government owned entity, starting its life back in 1916, as the Commonwealth Serum Laboratories.It had a part in providing Australians with rapid access to 20th century medical advances including insulin and penicillin, and vaccines against influenza, polio and other infectious diseases.
In 1994 it was sold off by the federal government and was listed on the ASX. At a price that now seems absurd, the equivalent to 77 cents per share (actual price was $2.30). Compare that with the current share price over $203 and take in consideration that CSL has paid out over $5.50 of dividends since listing, makes it an amazing opportunity for anyone that purchased it at float. In fact, if the government didn’t decide to sell off the company, CSL would be of similar size to the Future Fund.
One of the amazing things about CSL is how heavily they invest into the research and development process (in 2016-17 alone the company spent $645 million on that area). By doing this the company is investing for long-term growth of its business. CSL has been doing this since it first listed and probably many years before, it is what separates CSL from the pack of dividend focused companies.
It takes several years, sometime decades, along with hundreds of millions of dollars to develop the next potential commercial blood treatment that CSL sells. This is why it is so hard to value this business by traditional metrics. Add to this they are in a sector where there will always be something new to cure CSL is unique.
CSL thrives on two natural barriers to entry. The first is licensing regulations required for each of their products across every global market and the second is that in order to pass the first barrier you need to sustain massive losses until volume reaches a point that you can compete with the majors. Most companies don’t have enough money to conceive, develop, manufacture, get approvals and market a new product. CSL dominates this space globally, together with Baxter Inc and the recently merged, Griflos-Talecris. CSL however does have a substantially higher exposure to emerging markets specifically China. The macro trend suggests that as countries become wealthier, they will spend a lot more on healthcare, their diets will change, and they will increasingly require CSL’s treatments.
The other attractive thing to potential investors is that CSL runs a products business that has little to do with economic cycles. The company’s financial performance is not reliant on prosperous times, and in fact will not really be affected by recessions or downturns, only by the ability to continue collecting blood plasma.
CSL markets its self a not just an Australian, but a global biotechnology company that develops and delivers innovative medicines that save lives, protect public health and help people with life threatening medical conditions. CSL has the majority of its operations in Australia, the USA, Germany, the United Kingdom and Switzerland.
What does CSL really do?
To tell you the truth I find it difficult to understand, I’ll try to summarise as follows. CSL develops, manufactures, and markets biopharmaceutical products mostly derived from Immunoglobulins, a constituent of blood plasma. So, it helps that CSL is the biggest collector of blood plasma in the world. The compounds they extract help treat an array of mostly fatal medical conditions that affect mainly the nervous system. CSL is the world leader in the space, not just because they have been around for so long or are very innovative in new products, but due to their global facilities that operate on a very low cost of production. They are also a major provider in the US$6bn influenza vaccine industry. CSL provides medicines in 60+ countries and employs more than 19,000 people in over 30 countries.
CSL’s three main operating divisions are:
CSL Plasma is the largest collector of human blood plasma in the world, sourcing plasma from hundreds of thousands of donors globally to produce a range of life-saving medicines for critically ill patients.
Behring is a global biotechnology leader with the broadest range of quality medicines in the industry and substantial markets throughout the world. Their therapies are for treating bleeding disorders, immunodeficiencies, hereditary angioedema and neurological disorders,
Seqirus is one of the largest influenza vaccine companies in the world and a major partner in the prevention and control of influenza globally. It is a transcontinental partner in pandemic preparedness and response, and a leading supplier of influenza vaccines to global markets for both northern and southern hemisphere seasons.
10 years of greatness
The table above says it all. From 2009 CSL has increased its sales 3 times and its dividend by 3.5 times. Many investors say that it is a great company at a great price (29.6 times). However it trades at the same premium relative to the rest of the market today as it did in 2009,(noting the market is about 50% more expensive then it is was in 2009).
It has achieved this all while maintaining it operating profit, and net profit margin, and growing its return on assets and capital employed and doubling its return on equity. No wonder this company is held so close to many peoples’ hearts? That and the fact that many people bought it for $2.30.
As mentioned before why CSL is so hard to value is that is scale and consistency of successfully innovating new solutions and products, that feeds into a every aging population and rising wealth levels. For example, the ability of immunoglobulins to treat Alzheimer’s diseases could deliver a substantial boost to its long-term earnings.
Most recent results
After upgrading expectations in the previous quarter, CSL delivered another excellent result. Revenue increased 11% with their operational leverage resulting in a 33% increase in EBIT to $2.380bn and a 28% increase in net profit to $1.729bn. The previously underperforming flu vaccine Seqirus business was a particular highlight as sales continued to grow. With cash flow growing 53%, management announced a 26% increase in their dividend. They do however remain focused on investing for the future with research and development to increase 10% by $200m in 2019 to support further development of the CSL112 heart treatment. The companies USD exposure remains a major tailwind, with the expansion of their plasma collection centres in 2017 and 2018 ensuring they can maintain their dominant market position. The valuation remains high, however, more than justified on its performance.
Do we invest in it?
Yes, we do. We have owned the company on three occasions over the past 15 years, CSL currently sits in the Wattle Partners Value Bucket, given its growth-oriented nature of its earnings.