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Should you buy CSL?

Australian investors looking for world-class businesses are limited for choice on the ASX. One exception is in the healthcare sector, where Australia has produced some truly world-class companies, including Cochlear (ASX: COH), Resmed (ASX: RMD) and CSL (ASX: CSL).

CSL has been a true Australian success story. Chief Executive Brian McNamee has led the company for the past 23 years growing the company from a government-backed organisation to a $30 billion ASX giant. Since floating in 1994 at $2.30 per share (77c in today’s terms after a 3:1 share split in 2007) the current share price of $59 represents a gain of 7,500%.

CSL is a leading blood plasma and vaccine company. The industry is dominated by three major players, with CSL enjoying a dominant market position and strong market pricing power. CSL is the number-two player behind US-listed Baxter International. Strict licensing regulations make it difficult and costly for potential competitors to enter the industry. CSL’s strength is highlighted by the fact that it is the only manufacturer of influenza vaccine in the Southern Hemisphere and currently holds the contract to provide the US government with influenza vaccine in the event of a global flu pandemic — potentially worth up to $1.5 billion if such an event occurred.

CSL’s first-half results showed strong underlying growth and solid cash flow generation, with operating efficiencies driving margins to new highs. NPAT increased 24% to $627 million and EPS increased by 30%. Strong operational leverage via scale efficiencies and product mix was the highlight with EBIT margin up 31%. The half-year dividend was up an impressive 40%. Further, in October last year, CSL announced a $900 million share buyback (21% complete in February 2013) with shareholders continuing to benefit from this and previous capital management initiatives. CSL has a rock solid balance sheet with cash of US$757 million versus net debt of US$371 million.

CSL has flagged an increase in FY13 NPAT of 20% with EPS forecast to grow at 24%. Some analysts have stated that these estimates may be conservative.  Management has indicated that the company will continue to benefit from margin expansion arising from operational efficiencies, including blood plasma collection centre efficiency, and that margins of 31-32% were sustainable.

CSL is well positioned for future growth:

  • The company is strengthening its presence in emerging markets – two-thirds of CSL’s potential consumer base is located in emerging markets and will undoubtedly be a huge driver of future earnings growth.
  • Developed economics continue to increase spend on healthcare.
  • CSL will be a beneficiary from a flu pandemic, currently holding the contract to supply the US government.
  • One big opportunity is in the development of CSL’s recombinant portfolio for hemophilia patients which is an estimated $US8.5 billion market.
  • Market conditions for albumin and immunoglobulin have improved and conditions are likely to remain favourable in the short to medium term. Further, CSL’s speciality products division is experiencing strong growth resulting in product growth which is balanced and optimal for margin expansion.
  • Finally, CSL will benefit from a lower Australian dollar.

In July this year, incoming CEO Paul Perreault will take over the reins from Brian McNamee. Perreault has not outlined any major changes to strategy, and given he ran the company’s largest unit, CSL Behring, a smooth handover is expected.

Foolish takeaway

CSL trades on a forward PE ratio of 21.8 and its current share price of $59 hovers near its all-time high of $64. While this may appear expensive, CSL is a quality company, well-positioned for future growth and is a worthy portfolio addition for investors with a long-term focus.

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Motley Fool contributor Bradley Murphy owns shares in Cochlear, Resmed and CSL.

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