With around the clock news updates and up to the minute reporting season blogs, it is easy to miss the hidden gems that fall through the cracks of your investment process.
But an equally common mistake among many investors is over simplifying or generalising a business because it is well known and well covered in the press. For example, CSL Limited (ASX: CSL) is often mentioned in articles as a standout Australian company, with global market reach and exposure to a falling US Dollar. But beyond that, do you really know how the company makes money?
With the stock price flirting with the $100 mark, it is a good time to take a deeper look at the successful business model that is driving the share price of CSL.
The four engines
CSL is a biotechnology company that has an end to end strength in producing blood related products for healthcare applications. That means it researches, develops, tests, commercialises and manufactures products that help treat serious medical conditions.
Broadly speaking, there are four major contributors or "engines" of revenue generation in CSL. Using the most recent full year results, we can get an insight into these areas and how important they each are to CSL.
The crown jewel is the immunoglobulin division. Immunoglobulin accounted for over 40% of financial year revenues last year. These antibodies are used to assist doctors in treating severe medical conditions such as multiple sclerosis. The total addressable market globally is worth around $8 billion, and CSL has as meaningful share of it.
But this position of strength has been the result of several factors, some of which may be moderating. In particular, the strength of CSL in this market may have something to do with the relative weakness of other global competitors in the space.
And the market is also a growing one, which has the effect of attracting competitors and further investment in the area. Immunoglobulin products are not a "winner take all" proposition, but CSL will now have to work harder than in previous years to maintain its market share, or grow it.
The supporting cast
The other operating divisions are smaller contributors to overall revenue. Factor VIII proteins are those blood products and supplements that assist in better clotting when a patient is prone to excessive bleeding. This makes them invaluable when a patient is on necessary blood thinning medication that can make surgery or other procedures life threatening due to blood loss. These products account for around one-fifth of total revenue.
Together, specialty products, albumin (used to treat the liver) and bioCSL make up the remainder of revenues. It is within this bioCSL products division that the future growth of CSL may be contained.
CSL recently acquired the influenza division of Novartis for what many considered to be a bargain price, and the transaction finally completed just this week. Alongside existing CSL assets, the merged entity is a clear global number two in creating and manufacturing flu vaccines that can have global applications.
If CSL can integrate and grow the division successfully, it will likely become a new profit engine for the company in its own right.
The diagnosis
CSL is a global player in the biotechnology space, with significant advantages in its product portfolio, technology and research functions. As a large scale manufacturer, it also benefits from having grown to a point where it can successfully harness economies of scale to drive down unit costs and ultimately create a more efficient business.
With strong beneficial exposure to a falling US Dollar thrown in for good measure, it's not hard to see why CSL is one the most sought after stocks on the market.
