CSL Ltd (ASX: CSL) shares are still down more than 10% in the last year, as the chart below shows. But, the business is also regaining investor confidence and the broker UBS believes it can climb further.
CSL is a global biopharmaceutical giant with three core divisions. CSL Behring provides plasma-derived products, recombinant proteins and other therapies, CSL Seqirus offers vaccines and CSL Vifor is involved in treating iron deficiency, nephrology and cardiorenal products.
The company may face uncertainty amid changes in the US, but UBS is still bullish.
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UBS thinks CSL shares are undervalued
The broker has a buy rating on the business, with solid underlying earnings per share (EPS) growth and valuation support.
UBS said in a note that even after allowing for a smaller research and development (R&D) premium, it believes the ASX healthcare share is "undervalued in a status-quo operating environment". The broker forecasts 3-year EPS compound annual growth rate (CAGR) of 15%, with a "potential reduced risk around core operating earnings."
The broker acknowledged that CSL shares are a "high risk/reward investment over the next 12 months", given current issues associated with the US pharmaceutical industry.
What are the issues?
UBS noted that impacts from the US' most favoured nation (MFN) policy largely relate to the removal of "material US drug price premiums". In other words, CSL may not generate as much revenue/earnings from its products in the US. The broker estimated around 22% of the company's FY27's estimated operating earnings (EBIT) could be impacted.
UBS is unsure whether it will be fully implemented, given industry opposition and potential mitigation. The broker estimated the positive offset to be 5% to 11% of FY27's estimated EBIT, with plasma exemptions or non-US price increases, as well as vaccine product changes.
The broker also noted that pharmaceutical imports are currently subject to a national security investigation and potential future US tariffs. UBS thinks the potential initial impact to CSL "should be limited to a single-digit EBIT impact with likely plasma exclusion or future US fractionation facility. If faced with high long-term tariff rates, CSL may redirect high-demand products with smaller US price premiums, especially Behring non-plasma products."
It's expecting Seqirus' operating result to decline by 9% in FY27, with weaker flu vaccine sales possibly growing because of vaccine hesitancy, less primary care provider proactiveness and lower avian flu sales.
Why does UBS like CSL shares?
The broker thinks CSL will see "solid EBIT margin expansion" of 160 basis points in FY26 because of lower costs in Behring and modest upfront R&D savings.
UBS also sees potentially less operating earnings risk due to "slightly stronger" revenue in Behring and Vifor, coupled with a smaller US dollar headwind.
EPS is expected to grow at a CAGR of 15% in the next three years, mainly due to Behring sales and gross profit margin expansion. However, at this stage, UBS' estimates don't include impacts from tariffs or MFN at this stage.
UBS currently has a price target of $310 on the business, which is where analysts think the share price will be in 12 months from the time of the investment call. That implies CSL shares could rise by 14% over the next year.
Time will tell whether the broker is justified in remaining optimistic.
