BUY HOLD SELL – CSL (ASX: CSL)

What to do with CSL? The stock is ~20% off its February high and in a technical downtrend. Blood plasma collections in the US and brokers see more downside risk in the short term. Results are fast approaching (August 19) which has left many investors wondering what to do. CSL (ASX: CSL) is a high-quality business, the company affirmed its FY20 guidance supported by strong flu demand and lower R&D spend but is unlikely to provide an outlook on FY21 due to the impact of the pandemic. A key issue for FY21 remains the second wave of the pandemic in the US, and the potential for continued disruption of plasma collection which will impact earnings in 2H21. UBS has calculated that every 5% decrease in plasma collections over 6-months, results in a ~2% earnings downgrade for the year. Estimates are for a ~20% fall in collections for over the April to September period. You do the math. Not great. But how much of that is factored into the price? It isn’t new information. The market is expecting that to some extent and CSL, in its defence, has strategies to mitigate from collection downturns. But it is unclear how that is currently balancing out. CSL has been keeping busy in lockdown. It paid US$450m upfront for the rights to commercialise a treatment for hereditary bleeding disorder haemophilia B. Advancing its push into the gene therapy space. In May, the company tapped foreign debt markets for $1.2bn, shoring up its cash reserves. Retiring CFO, David Lamont, noting the issue was oversubscribed. The company also began trials of a COVID-19 vaccine, using the antibodies from the plasma of recovered patients. Despite all this hard work, the currency tide has been pushing against the business as well. The majority of its revenue comes from the US (46.5%) and an elevated AUD isn’t good news for the blood products giant. Our dollar is not showing many signs of slowing down either. Main Observations:

• CSL likely boasts some of the most impressive fundamentals out of any top ASX company. ROE of 35.7% is extraordinary.
• EPS growth is forecast to outpace revenue growth in every foreseeable period. We often highlight that dynamic to identify companies that are efficient at adding value.
• A PE of 42.6x isn’t cheap, but that’s what you have to pay for quality. COH on 78.2x, RMD on 45.1x and RHC on 36.4x.
• The yield it largely irrelevant, most of its profits go back into R&D.
• Of the 13 brokers surveyed by Thomson Reuters, almost half have a BUY or STRONG BUY recommendation.
• It is trading at a 4.4% discount the average broker target price and a 42.4% discount to intrinsic value.

WHAT SORT OF INVESTMENT IS CSL? CSL is a long-duration, relatively low volatility growth stock, with a sustainable competitive advantage, market-leading position, and stable earnings. It has strong management and a history of producing results. The company's research and development pipeline has been commercially successful and major launches sustained low-teens sales growth in previous periods. The antibody industry in which it operates is a narrow oligopoly and CSL is the largest player with a market share slightly more than one-third. There are few substitutes to most of its products – particularly in the plasma products space. SHORT TERM TECHNICAL VIEW CSL is ~18% below its February high and ~17% above its March low. The downtrend from February to now is clear although, there are encouraging signs of support around the $275 mark. A level that proved to be quite significant during the initial market sell-off and in the fourth quarter of 2019. We would want to see further consolidation around $275 before taking a more bullish view. RSI in the middle of the range, not proving much direction. BROKER STUFF UBS sees plasma collection falling by 20% for the April-September period. Anticipates flu vaccine awareness and demand in the US and Europe to increase due to risks of COVID-19 co-infection. Macquarie observes CSL does have measures to combat lower collections but sees more downside risk in the short term. FY21 EPS estimate sits some -4% below market consensus. Morgans Stanley holds a similar view to the other brokers although, maintains a more bearish target price at 26500c. Credit Suisse sees upside for flu vaccines, given demand has increased in order to limit the burden on health systems from the coronavirus pandemic. Anticipates Seqirus volumes to the US will increase by more than 10% in the upcoming northern hemisphere flu season. Seqirus accounts for 13% of revenue. The segment manufactures and distributes non-plasma biotherapeutic products and develops influenza related products. The broker considers the stock cheap and cites value. Citi observes relatively good value, although adds the FY21 earnings risk remains to the downside. TOP INVESTORS Since the start of the year there has been a net sale of ~460k shares by the top investors. If you include BlackRock’s purchases in November last year, this improves the observation with their interest in CSL increasing by more than 4m shares across several different segments. What is likely more telling, however, is the recent transactions before the end of the financial year, with sales outnumbering buys. Commentary from Roger Montgomery, UBS and T.Rowe Price among others suggests the opposite. Declaring purchases as the share price lags the market. Back in July, UBS handled a $142m block trade for almost 500,000 shares at $287. The sale came about three weeks after the broker executed a $180m CSL block at $284.4, the biggest institutional trade in 2020. SHORTING Very few are taking bets against CSL with 0.15% short interest. No other major takeaways. Going back 3-year the highest-level shorting gets to is 0.62%. Conclusion CSL’s international peers in Grifols and Takeda, who reported at the end of July, both enjoyed strong revenue growth in their plasma businesses in the June quarter but outlined a challenging plasma collection outlook. There is some approximate guidance as to what CSL’s result might look like. On the positive side, normalising sales and demand strength for its flu vaccine are anticipated to underpin a level of resilience. Brokers are all bullish ahead of results and there is a sense a significant level of downside from lower plasma collections has been factored into the share price. The risk you carry into earnings, however, is if collections fall below the expected ~20% decrease. From a technical standpoint, it would be premature to jump on the stock when it is still in a defined downtrend. Second wave impacts in the US also have the potential to derail operations further. It would be prudent to wait until results on the 19th of August before deciding. If it was to report well, the theory is that momentum will likely continue in that direction, with CSL at such a critical support level, a break either way of 27500c would likely drive our decision to get involved, or stay away until a more pleasing technical picture evolved. HOLD.