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3 reasons to buy CSL Limited

production of drugs in the lab

An ageing population presents the healthcare sector with a long term growth opportunity. It could act as a positive catalyst for the share prices of healthcare companies CSL Limited (ASX: CSL), Ramsay Health Care Limited (ASX: RHC) and Cochlear Limited (ASX: COH). That’s because their target market size should rise in future. In CSL’s case, its competitive advantage and financial strength are two other key reasons to buy it right now.

Ageing population

Between now and 2050 the number of people aged 60 or over is expected to rise by over 100% to 2.1 billion people. Within the ‘oldest-old’ person category, the number of people aged 80 or over is set to see even faster growth. Their number is forecast to triple to 434 million by 2050. This provides CSL with a growing market for its products, since illness and chronic conditions are more prevalent in the 60 and over (and especially 80 and over) age bracket.

Further, illnesses such as influenza can be more serious in older people. Between 5% and 15% of the world’s population contracts influenza each year and a growing number of older people mean that demand for influenza vaccines is likely to rise. This puts CSL’s Seqirus division in a strong position to capitalise on a demographic tailwind over the long run.

Financial standing

CSL’s acquisition of Seqirus has strengthened its long term growth outlook. Its financial standing provides further opportunity for M&A activity. Evidence of this can be seen in the company’s cash flow and balance sheet strength.

For example, CSL has a net debt to equity ratio of 100%. This could move higher in my view. That’s because CSL has a low positive correlation with the performance of the wider economy. This means that its risk profile is lower than for many of its index peers which indicates higher levels of debt can be accommodated on its balance sheet. CSL’s net operating cash flow covered finance costs 21 times in the 2016 financial year. This shows that it could afford to borrow more to fund acquisitions even if the rate of interest increased over the medium term.

Competitive advantage

CSL’s financial strength also allows it to invest heavily in R&D. This provides the company with a competitive advantage over rivals since the barriers to entry in a number of its key markets are high. For example, CSL has spent over US$2.3 billion on R&D over the last five years. This strengthens its economic moat versus peers.

CSL has also invested in improving the efficiency of its operating processes. This keeps its costs lower than for many of its sector peers and has contributed to a return on invested capital which is consistently above 20%. This improves the company’s competitive advantage and reduces its overall risk profile.

Alongside its sound finances and an ageing population, CSL’s competitive advantage is a reason to buy it now. However, before doing so, these three blue-chips are worth a closer look.

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As of 2.11.2020

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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