Pinned straw:
Recently we built up a large sum of cash in our IRL portfolios due to the Blundy-Itaoui acquisition of Best & Less (which has almost reached compulsory acquisition stage now, 90% of ownership).
Looking for somewhere to park the cash, I chose to invest in CSL shares. CSL is now in the Blue Chip dog house, closing at a 12 month low of $266.90. The share price has been going sideways for 3 1/2 years. I thought this might be a reasonably safe place to park a lot of cash with a 12 month horizon in mind. Hopefully I can still extract a bit of cash along the way (if needed) by selling a few shares.
Macquarie thinks CSL is a safe haven according to this article in the AFR from the 19th June - Macquarie’s seven stock picks to ride out weaker earnings - see excerpt below:
Safe havens
“Its advice is to stay defensive, even in the face of the recent downgrades from safe havens such as CSL, Amcor and ASX.
Macquarie’s analysis suggests (perhaps unsurprisingly) that cyclical stocks deliver the most earnings downgrades when forward orders fall and the economy slows. Media, discretionary retail, financial services, insurance and banks all typically experience double-digit falls in EPS when the economy enters a downturn phase.
On the other hand, sectors such as health, telecommunications, consumer staples and utilities experience either earnings upgrades or below-average downgrades.”
Since this article was published on the 19 June, CSL has fallen a further 6 per cent, from $284.44 to $266.90. So NOT so safe in the short term. It might fall further yet! The chartists might be suggesting you to get out of CSL now and buy back in when the share price goes above $320? (That never makes much sense to me).
I am reasonably happy with the guidance for 2024 (NAPTA up 13% to 18% on the market update on 14th June) and they haven’t hit their straps yet with the Vifor acquisition.
Most Brokers think there might be some upside to CSL according to the commentary by Bronwyn Allen on The Motley Fool yesterday:
“Macquarie has an outperform rating on CSL shares with a $326 price target.”
“Morgans believes CSL shares are “poised to break out this year“.
The broker has an add rating and a $323 share price target for CSL.
Morgans says:
A key portfolio holding and key sector pick, we believe CSL is poised to break-out this year, a COVID exit trade, offering double-digit recovery in earnings growth as plasma collections increase, new products get approved and influenza vaccine uptake increases around ongoing concerns about respiratory viruses, with shares offering good value trading around its long-term forward multiple of ~30x.”
“The most bullish of the bunch is Citi. It has a buy rating and a 12-month price target of $340. This implies a 27% potential upside on the stock.
This actually represents a cut in Citi’s share price target following CSL’s recent update, which revealed currency headwinds for the company, given it reports its earnings in US dollars.
Citi was previously tipping $350 per share by the end of FY24.
There is still the threat of a US recessionin FY24, which of course, isn’t good for US shares or ASX shares.
But Morgan Stanley points out that US healthcare stocks have outperformed the market by an average of 13% during the past four recessions.”
The consensus share price target from 18 analysts on Simply Wall Street data is $324, which represents an upside of 21%.
Now all the analysts could be wrong. CSL is a complex global roll-up. I’m not even going to attempt to value it given there are hundreds of others who are more skilled than me already doing just that. Most think CSL is worth more than it is selling for now, and I don’t think it is going broke any time soon. So I think it might be a reasonably safe place to park a lot of cash for 12 months or so.
@Rick @mikebrisy and everyone else.
firstly i have zero tolerance for holding stocks as a cash proxy, just dont want to take that risk. SWAN.
on CSL, i got to know mgt quite well when i covered the company for an institution about 10 years ago but first met mcnamee on the ipo roadshow in 1995ish.
the positives, to summarise, the culture is quite considered and conservative, they have achieved best practice in manufacturing and have a disciplined and judicious approach to R&D and capex. i suspect their reliance on moon shots and "hail mary"s is extremely low versus peers, they have had no significant stuff ups, same as MQG, which differentiates them from peers and part justifies their premium.
now the negative which i will concentrate on here. firstly their PE premium is now full. those lucky enough to hold for the rerating, several years ago, of course did well and it is a lesson to look at global peer multiples not domestic to gauge where the PE ends up. however a further rerating is very unlikely, imo, but possibly leads to room for a modest compression in the multiple.
with ratings done it falls to earnings to drive the SP, (dividends not big). i think the impacts of C19 have obviously been under estimated for CSL, firstly the volume drop in collections and then the higher price to be paid for them. given the very long inventory cycles at CSL the uncertainty of when that rectifies has given cause to overly optimistic expectations, in hindsight. maybe the company could have been more active in hosing down expectations, maybe they didnt know themselves, given it was an unusual circumstance.
earnings have been impacted by FX and other smaller issues but hardly a thesis breaker. the unexpected and sustained grwoth in the uses of IG has been the driver, imo.
the Vifor acquisiton obviously needs to deliver and it si too early to make that call, imo. the company is right in CSL's wheelhouse where manufacturing expertise and distribution can add value in an "unsexy" part of the industry, where CSl resides. they can be given the benefit of the doubt at this stage, imo.
in summary at 35X earnings need to grow and that has not happened as consistently as one would have wished but most everything that has driven that has been outside mgt control. no own goals.
one other area that sits uncomfortably with me is that CSL is extremely well held. plus there has been a recent large equity raise that adds more stock to already well held positions. almost every serious investor in Australia holds CSL, for retail punters it is rusted on , a "no brainer", that is uncomfortable for me. even in institutional land it is very well held and not only by the grwoth managers who have to hold a lot of it. value guys would hold CSL as a growth proxy given its size in the index, its great record, and as a growth hedge. given the great reputation of CSL, it si a case of nobody gets sacked holding CSL. that sits uncomfortably with me as well. if our best decisions come with a certain amount of discomfort, it is not there with CSL.
what doese this mean for the share price? to me it means there are many holders with more than full allocations or are holding without conviction. that is stock indigestion, when downgrades appear they get flushed out and this takes time to work through. for the long term 3-5 year holders maybe not an issue but for momentum/ST guys it is an issue.
this disequilibrium needs to balance out imo, of course determining the length of this is almost impossible , when it ends it ends. the stock needs to find its way to natural holders whoa re already full is the issue to me. just takes time.
may the IG cycle continue to surprise to the upsidde! thats all i have, could be wrong
disc held (like everyone else)
Like you, @Rick, I use my shares in CSL as my emergency cash fund. Financial advisors often recommend keeping 6-12 months or up to 3 years of living expenses in cash, depending on one’s life stage and risk tolerance. They also suggest keeping this money in cash rather than equities. However, with low interest rates (until recently) and now inflation, this approach doesn’t make much sense to me.
I mentally allocate a third of my CSL holdings as my emergency fund, which I can easily liquidate if needed. Although CSL’s share price hasn’t changed much in the past 3 years, it’s no worse than holding cash long-term and I expect it will return capital growth at some stage.
@Rick and @Slew like you both, I have observed $CSL come back into the buy zone following the downgrades resulting from its update on weaker margins.
Like @Rick I don't model CSL because it is quite a complex business and I don't think I can generate better insights than the well-resourced research desks of some of the big investment banks that do primary data collection, like monitoring traffic at plasma collection centres!
Hence, I was surprised that the leading analysts didn't see the margin compression resulting from increased cost of plasma collection (which are yet to reverse) and largely denominated in USD compounded by the weaker ex-US revenues driven by strong USD currency impacts. Sure, I didn't see it either in terms of the bottom-line margin impact, but it was obvious when the story unfolded and once again it makes me question what those highly paid research analysts actually do with their time.
On the contrary, prior to the downgrade, the collective narrative amongst pundits was that after >3 years tracking sideways, $CSL was building up for a breakout. One fundie has even been touting $400 CSL for the last 6 months. The narrative was so widespread, I was starting to believe it myself.
Now the narrative is: $CSL is a must-buy being around $250-260, with the broker consensusa at $320. Rarely does a gap of +21% open up between the share price and analysts consensus for this stock.
Like you both, I am thinking about topping up. $CSL has fallen from 2nd largest RL holding in my portfolio to 6th. But before doing so, I prepared the table below to compare $CSL to a selection of global pharmaceutical companies. I stopped at a selection of 5 because the picture is clear.
First the metrics chosen. As valuation metrics I chose forecast FY23 EV/FCF, EV/EBITDA, and P/E. I also have thrown in ROE for good measure. I then chose the 5-year CAGR for EBIT from 2018 to 2023(F) and the forecast 3 year CAGR from 2022 to 2025.
The reason for chosing EBIT CAGR over NPAT, is that pharmaceutical companies tend to have frequent material "exceptional" items reported below the EBIT line which can distort the NPAT in any one year leading to significantly unrepresentative CAGRs if they hit either the beginning or end year. For example, a net income result is likely to be distorted by exceptional profits (from business unit sales) or impairments (e.g., from drug failure R&D write-downs). An example is $GSK, which had a $10bn exceptional income item in FY22 as a result of a major disposal. So you get a better view of the ongoing growth trajectory by focusing on the operating EBIT line.
So what?
Well, by any measure, even after its share price correction, $CSL is still a very highly rated pharmaceutical company. Indeed, while its EBIT growth over recent history and forecast is neatly bracketed by $MRK (below) and $AZN (above), these two companies are very significantly cheaper on all valuation metrics.
Why is this? I can think of a few reasons.
Firstly, compared with the global giants, $CSL is still relatively small (2022 EBIT of A$2.927bn compared with US$13.35bn for $AZN and US$22.522bn for MRK), and potentially it is easier to believe that it can sustain high growth above the industry average for longer. For the global giants, the replenishment of the R&D funnel is a major, perennial challenge.
Secondly, $CSL one of only a small number of large Australian healthcare companies and the only global top-50 pharmaceutical company in the ASX. Thus Aussie investors and funds wanting exposure to this sector in Australia don't have the choice that investors in the USA and Europe have, and this contributes to $CSL's premium rating. I guess that's OK if it is sustained, and there is no reason it shouldn't be.
I make these comments not because I am down on $CSL. I am not. It is a global leader in its therapy areas with a strong development product pipeline. Furthermore, through the Vifor acquisition it added world-leading knowledge in renal therapies to its existing leadership in blood plasma protein, recombinant technology, cell and gene therapy, and vaccine technology. There are clearly science synergies between these areas, so my primary reason for holding $CSL is that I believe over the very long term, it will continue to grow strongly driven by world-leading science. Value will arise both from new organic discoveries or from advantaged insights to help it make smart acquisitions. It is well-managed, even if there is a new CEO who now faces his first challenges to prove himself.
I believe, however, that $CSL should NOT be seen as a low risk investment. By all means, as an alterantive to cash, buy the index (e.g. $VGS). But $CSL must execute well over the next year or two to demonstrate that it can restore its % margins. The point of my analysis below is to make the case that there is ample room for further price downside if it underperforms in the short term.
Personally, I am going to top up my CSL position a bit because I believe there is now a significant long-term upside, and $CSL rarely presents this level of value. The current margin pressures are not due to any failing on the part of management or the lack of company capabilities. Both drivers of margin pressure were the result of external factors beyond $CSL's control, and both should be reversed over time.
I believe $CSL is a great company and as a long term investor, it is attractive to me when compared with my other holdings. But it is by no means a risk free proposition.
Disc: Held in RL (4.1%). Not on SM
Figure 1: Comparative Analysis of a selection of leading global pharmaceutical companies
Source: Marketscreener.com
@mikebrisy Do the service(s) you use specify analyst target SPs for CSL in AUD or USD? I hadn't paid attention until reading this thread, but the Refinitiv sourced target SPs I see in SelfWealth look low but I suspect may be specifying a USD target SP (high end $236USD == $344AUD and low end $170USD == $250AUD) which seems weird for an ASX listed stock... *shrug*
I use Marketscreener.com (paid) and Tradingview (Free). Here are the consensus outlook screen.
Marketscreener uses USD, but converts easily to AUD.
Tradingview used AUD.
When in doubt as to what a service is showing, I triangulate between the two services, as you are right in that sometimes it is confusing, and I think sometimes the datasets and ranges might even be corrupted by incorrect conversions. The weakness of both services is that you don't get to see the individual recommendations. That was why I used to subscribe to FNArena, as there was usually a subset of individual reports included there, which helped my fill in the blanks. But I concluded I wasn't getting much value from that, so I am trying going without.
Marketscreener:
And here is TradingView:
