Pinned straw:
With all the talk about McNiven's formula (and having read the book over the weekend), I gave it a crack this afternoon taking all of the reported numbers at face value but adding back share-based payments as expenses.
One of the features of the approach is that the 'required return' (AKA discount rate) is intended to be a varying figure taking into account an assessment of business quality, rather than a hurdle - which seems quite Buffett-like to me. Anyway, with a 9.7% discount rate McNiven's formula will give you today's closing price.
Take all this with a large hanful of salt as I'm eagerly awaiting Rick's presentation on McNiven's formula and I've probably messed something up, but a 9.7% return over time in the current environment seemed to rhyme with what is being said by everyone in this thread.
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
bought sold $250/300 range
Thought the same too, decent result - I feel that Vifor isn't doing too well considering they paid a top price as per below comment though:
@Mujo - I think you are right.
CEO Paul has just been asked by one of the analysts, "do you think Vifor will still grow as strongly as you expected" (question paraphrased).
Short answer "Yes". This in the context of prior commentary on strong competition and constraints on use of some products, in his response Paul offset this by talking about them seeing "new opportunities", as well as driving the global rollout.
I guess you'd expect him to say nothing less.
My own view is that in these businesses you have to take a longer term view. Of course its nice to see them get a short term kick, but I will be slower to judge on this.
Doing some rough maths, Vifor revenue in 1H FY23 for 5 months was $889m, which if you do a crude 6/5 multiplication is $1067m.
Compares with $1,011m reported revenue in 1H FY23. Below is a table for further breakdown - no adjustments for currency.
So, there are lots of reasons why NOT to do the above analysis, however, it does put some quantification on what is a softer narrative.
It will be good to see how the clean comparison looks in H2 (which of course won't be reported, but we can do the maths!)
Disc: Held in RL
EDIT: changes Q2 to H2 in last sentence.