Is the CSL Limited (ASX: CSL) share price a buy?
CSL is the largest healthcare business on the ASX, it's actually the biggest business in the S&P/ASX 200 Index (ASX: XJO).
The company recently released its FY20 result which included a number of interesting talking points.
CSL's FY20 result
In constant currency terms, which is how CSL likes to report its result, net profit after tax (NPAT) rose by 17% to US$2.1 billion and revenue increased 9%.
CSL said this result reflected solid growth in the immunogloblin portfolio. Privigen sales grew by 20% and Hizentra sales increased by 34%. There was continued growth with high patient demand for chronic conditions.
The haemophilia portfolio has successfully evolved, driven by Idelvion with sales up by 25%.
CSL also said that the transition to its own distribution model in China has been completed. That was a drag on earnings in FY20 with albumin sales down by 36% – which was in line with guidance. This Chinese transition will improve CSL's participation in the value chain as well as allowing the company to work directly with clinicians.
The healthcare giant also said that it delivered on its product differentiation strategy with strong profit growth for Seqirus.
So far, CSL said that there has been no material revenue impact to date resulting from the COVID-19 pandemic, though the situation is "fluid and some elements are unpredictable".
The CSL final dividend was US$1.07 per share, equating to $1.48 in Australian dollar terms. That brings the full year dividend growth to 11% in AUD terms, a total of $2.95. At the current CSL share price it has a dividend yield of around 1%.
CSL announced that clinical trials were suspended in FY20 as a COVID-19 precaution, but these trials have now recommenced.
Investing for growth
I have always been impressed by CSL's commitment to research and development. It is continuing to invest in its pipeline of products and it's also involved in the global effort to tackle COVID-19 with one vaccine partnership and four therapeutic candidates under investigation and development. It's the new products that will drive future earnings.
What I thought was interesting this year was that the company made two bolt-on acquisitions. It acquired the license rights for a haemophilia B gene therapy program, etranacogene dezparvovec which had an upfront cash payment of US$450 million with further payments for milestones and royalties. It also acquired biotech company Vitaeris which is focused on the development of a treatment for rejection in solid organ kidney transplant patients.
Despite CSL having a market capitalisation of well over $100 billion, the company has still has plenty of growth potential – it's investing for growth. Major capital projects are underway at all manufacturing sites to support future demand and in FY20 it opened 40 new plasma collection centres in the US.
Is the CSL share price a buy today?
In FY21 CSL is expecting net profit to be in the range of approximately US$2.1 billion to US$2.265 billion. That top end of guidance would be up to 8%. CSL tends to be a bit conservative with its guidance, so I wouldn't be surprised to see CSL beat the guidance in FY21.
Nonetheless, CSL is looking quite pricey. It's true that people who thought CSL was expensive at a share price of $200 have missed out on a capital gain of 50%. It's one of the few ASX blue chips that is still growing profit during COVID-19. Its investing for growth should lead to longer-term profit growth. There's a lot to like and I'd prefer to hold it for the long-term than a resource business or bank.
But how much should we pay for a business that isn't growing that fast? CSL is now a healthcare behemoth – the next decade isn't going to be as good as the last decade.
At the current CSL share price it's trading at 39x FY22's estimated earnings. I think there are plenty of smaller businesses with much more growth potential like A2 Milk Company Ltd (ASX: A2M) which seem like they can produce better returns than CSL at the current prices.
