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Company: CSL Ltd  ASX Code: CSLShare Price: $29.97Market cap: $18bn Recommendation: ‘Hold’


Pig fever has hit our shores, and many victims of ‘the sniffles’ are now regularly being treated as potential cases of swine flu. Sales of popular remedies such as Roche’s ‘Tamiflu’, and GlaxosmithKline’s ‘Relenza’, are shooting through the roof. The outbreak has sparked interest in drug stgelopers aiming to uncover the next big blockbuster, but could prevention yield a more fruitful path than the cure? The question comes to mind as our local healthcare champion, CSL ramps up production of its Novel Influenza A (H1N1) vaccine – commonly known as the ‘Fluvax’.

After a dream run in which its share price rose more than 9-fold from 2003-07, the stock has spent the last eighteen months consolidating between $30-40. The largely sideways move has been a strong showing relative to the rest of the market. So having just received a $230m order from the US Government for its flu vaccine, should investors be expecting a second wind?

CSL has an incredible record of growth. Since listing in 1994 revenue has increased every year bar one (2003), while earnings have generally trended upward at a rate of 10% or more. The company has attracted considerable attention and investor envy for its medical innovations such as Fluvax and Gardasil, the cervical cancer vaccine. However its main business is blood plasma products – which account for around 80% of sales. The blood industry is attractive because of its resilient demand and steady growth profile, however operating in the blood market can be very messy unless you’re a big player. As fixed costs are high, economies of scale are critical. Although CSL has generated solid organic growth through its vaccine stgelopments and smart management decisions, most of its supercharged growth over recent years is the result of blood industry consolidation. CSL has been a key participant in the sector’s rationalisation – and its share price has basked in the benefits stemming from greater economies of scale. The trend was poised to continue in 2008 after CEO Brian McNamee struck a deal to acquire US based competitor, Talecris from its private equity owners.

The Talecris deal was set to edge CSL’s market share within a whisker of blood market leader – Baxter International. However as the transaction was recently blocked by US antitrust authorities (due to market power concerns), CSL’s strategy of fuelling growth via consolidation of the blood plasma industry has come under question. There are other targets for the company to consider, however with regulators now frowning on the company’s emerging pricing power, it appears the stock will be challenged to repeat its stellar, consolidation-driven returns of yesteryear.

Nonetheless, given the resilient demand profile of the blood industry, and CSL’s ongoing innovation in the R&D department, we do expect the company’s long term trend growth of 10%+ to continue. While this outlook would be enviable in any other company’s books, for CSL, it may not be enough to sustain the stock’s premium valuation (PE 20+) relative to the market. The swine flu outbreak is definitely positive for the company’s Fluvax orders, however the epidemic’s impact on CSL’s growth may be limited given the dominance of its blood business. Therefore in the absence of another deal in the blood industry or surprises from the R&D pipeline, we are soothing our upside expectations despite the ongoing spread of swine flu.

The stock should retain its long term growth path, however we expect the grade of its upward trajectory may be less impressive than yesteryear. While we’ve toned down our expectations, we still believe the stock is a deserving candidate for healthcare exposure within a long term blue chip portfolio. Its balance sheet is very strong. Debts total $836m, but could be paid back within one year from operating earnings. While the stock remains caught in its $30-40 consolidation pattern, we rate CSL a ‘hold’, but see retracements towards the bottom of the range as potential entry points.  

Tim Morris is an analyst at wise-owl.com. Please note that TheBull.com.au simply publishes broker recommendations on this page. The publication of these recommendations does not in any way constitute a recommendation on the part of TheBull.com.au. You should seek professional advice before making any investment decisions.


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