The share price of market darling CSL Limited (ASX: CSL) will end the week in the red but the stock has fallen to a point where Citigroup thinks it's too attractive to ignore.
Shares in the blood products maker tumbled 0.9% in after lunch trade to $187.07 as the S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index inched 0.2% lower.
But CSL isn't alone in the doldrums. It's peers Cochlear Limited (ASX: COH), RESMED/IDR UNRESTR (ASX: RMD) and Nanosonics Ltd. (ASX: NAN) are also underperforming.
Citigroup thinks the dip is a buying opportunity for CSL and it's upgraded its recommendation to "buy" from "hold" after watching the stock tumble 19% since the start of September.
"Predominantly, we believe this reflects an increase in the US 10-year bond rate, and a commensurate sell off on highly rated, long duration companies," said the broker.
The spike in the 10-year yield has been blamed for a global sell-off in growth stocks that are trading at a premium to the market.
While there is a fundamental reason for the yield and stock valuations to move in opposite directions, the big fall in CSL's shares is an over-reaction if Citi's calculations are on the money.
"Since the beginning of September, the US 10 bond has increased by ~50bp [basis points] or 10%. As a result of this material move, we have updated our DCF [discounted cash flow] valuation," said Citi.
"Our WACC [weighted average cost of capital] moves from 6.8% to 7.1%. As a result, our valuation and target price move to A$218 from A$238."
Investors can also take heart that there were no negative surprises at CSL's annual general meeting (AGM) yesterday. The company reiterated its FY19 guidance in constant currency terms although it did highlight the negative impact from the exchange rate, which will trim around US$60 million off its net profit for this financial year.
Consensus is forecasting an FY19 net profit of US$1.96 billion and Citi is a little ahead of consensus with a US$1.99 billion estimate.
One longer-term risk to CSL is a potential new treatment for a rare autoimmune disease called primary immune thrombocytopenia (PIT).
The new treatment could displace the need for Intravenous immunoglobulin (IVIg) in the treatment of PIT. CSL (among others) makes IVIg and could be affected by this new discovery.
However, this new treatment might take years to be commercialised as it is only just starting Phase II trials.
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