Revealed: My favourite ASX healthcare stock to buy now

This company offers a very favourable risk/reward ratio.

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While CSL Limited (ASX: CSL) has risen by 18% in the last year, I’m still bullish on its long term capital growth prospects. In fact, while I feel that healthcare peers such as Ramsay Health Care Limited (ASX: RHC) and Cochlear Limited (ASX: COH) offer excellent long term growth, CSL is my favourite ASX-listed healthcare stock for these three reasons.

International exposure

CSL operates in 30 countries across the globe and this provides it with significant geographic diversity. This reduces its risk profile and means that investors may require a narrower margin of safety when investing in CSL, with its diversity also providing a degree of protection against regulatory change or challenges in one specific region.

In fact, CSL generates only 10% of its sales in Australia, with the US being its largest market with 43% of sales. This means that it could stand to benefit from a weakening Aussie dollar. With the RBA being dovish and the Federal Reserve expected to increase interest rates by at least 25 basis points in the next year, the US dollar is widely expected to strengthen versus the Aussie dollar over the medium term. This could provide CSL’s earnings with a boost and act as a positive catalyst on its share price.

Financial strength

CSL’s leverage and cash flow provide its investors with confidence in the financial viability of the company, which means that its risk profile is reduced yet further. For example, CSL’s net gearing is 63%, while its net operating cash flow has averaged US$1.3 billion per annum over the last two years. This provides the company with scope to invest heavily in R&D, with CSL allocating around US$400 million per annum to R&D over the last five years.

Further, CSL’s cash flow has allowed it to engage in eight share repurchase programmes, with the most recent programme totalling almost $1 billion. Dividends have also risen at an annualised rate of 24.5% during the last decade. Although it yields 1.4% versus 4.3% for the ASX, CSL’s strong and improving cash flow means that cash returns to shareholders look set to rapidly rise over the medium to long term.

Growth potential

CSL’s financial strength has allowed it to engage in M&A activity, with its purchase of Novartis’ influenza vaccine business being a notable example. This business has huge growth potential in my view due to it commanding a dominant position within the industry after being combined with CSL’s bioCSL division to create Seqirus, the second largest influenza vaccine business in the world.

Further, the market for influenza vaccines is large and growing rapidly. For example, in Europe between 5% and 15% of the population contract influenza every year, while on a global basis there are between 3 million and 5 million serious cases of influenza each year which result in 250,000 to 500,000 deaths.

With CSL having sound finances and a diversified business model which operates in 30 countries, it is in a strong position to satisfy global demand for influenza vaccines, which in my view provides it with excellent long term growth prospects.

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Motley Fool contributor Robert Stephens has no position in any stocks mentioned. 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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