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The ASX’s 2 best manufacturers: Cochlear Limited and CSL Limited 

In the media recently, there was an article published by economist Jason Murphy, titled ‘Australia has reached the point of no return: It’s time to forget about making stuff’, which described the end of manufacturing in Australia.

Yes, the statistics don’t lie.

Services, as a proportion of total consumption, now far exceeds that of physical goods by a factor of almost 2 to 1. This is reflected in the source of new jobs created. According to the 2016-17 Budget papers, it’s predominantly household and business services that are creating the majority of new jobs, with manufacturing actually shredding employment (with the Australian motor vehicle manufacturing industry being a case in point).

There’s no doubt then, in the overall economy, there’s definitely a bias away from manufacturing, but that’s not to say that all manufacturing is ceasing in Australia.

In fact, despite the ‘big macro’ of declining manufacturing, it’s ironic then to see that a couple of Australia’s listed manufacturers have provided stellar returns for investors in recent history.

But we’re not talking about companies making 1950s-style textiles and commodity-like products which, these days, are mainly sourced from China and south-east Asia. No, the typical successful manufacturing company these days will usually invest a substantial amount of money into research and development in order to manufacture and distribute scientifically-based high-quality products that have a global market opportunity.

For those of you who wish to invest in businesses that “make” things, but will still provide the opportunity of a reasonable return on your invested capital, here are two companies to consider for your watch list:

Cochlear Limited (ASX: COH)

A manufacturer and distributor of cochlear implantable devices, bone-anchored and acoustic implants and sound processor upgrades for the hearing-impaired, the vast majority of Cochlear’s sales are made outside of Australia.

Being a knowledge-based company, its headquarters and manufacturing are located at Macquarie University in Sydney and, as a result, it places much emphasis on research to promote hearing health.

Cochelar continues to invest heavily in research and development (R&D), and according to the 2014-15 annual report, it had spent almost $128m on R&D in its ambition to maintain its lead in quality and high hearing performance for the end-users of its products.

Over the last 10 years, revenue has grown at a compound annual growth rate of 10.3%. Earnings and dividends over the next two years are expected to grow by 24.4% and 20.5% respectively.

Despite an overall shrinkage in the Australian manufacturing sector, Cochlear stands out as an extremely valuable contributor to Australia’s manufactured exports and its shares still look to be a reasonable investment at current prices.

CSL Limited  (ASX: CSL)

CSL has two world-class facilities in Broadmeadows (Melbourne): the CSL Behring Biotechnology Manufacturing Facility and its manufacturing plant for the production of its blood plasma product which, together, play a key role for CSL’s global drug development strategy.

It was a close call though. CSL could have invested this money anywhere in the world, but decided eventually to expand its R&D and manufacturing capacity in Melbourne due to ‘outstanding Australian science’, but perhaps also due to Australian and Victorian government ‘co-investment’.

A high-quality business with global reach and highly-valued products, CSL’s Australian manufacturing facilities are integral to CSL’s global supply chain and its efforts to combat rare and serious diseases, bleeding disorders and cancer.

Despite 2015-16 profit growth forecast to be only 5%, CSL remains one of Australia’s truly outstanding global businesses and should form the core of any long-term portfolio.

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Motley Fool contributor Edward Vesely owns shares in CSL Limited. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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