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.