CSL Limited (CSL)

By Daniel Goulding

I believe CSL is best of breed in the healthcare sector.

CSL is a global biopharmaceutical company. The company specialises in plasma products, vaccines, pharmaceuticals, and research and development. The company’s market capitalisation is circa $20 billion placing it in the top 20 stocks listed on the ASX.

Three-quarters of its revenue is generated by CSL Behring, a major player in the global plasma space. The company operates one of the world's largest human blood plasma collection networks, which is used to generate life-saving therapeutics.

Given the non-discretionary nature of its products and the oligopolistic nature of the industry (Baxter International, CSL and Talceris control 83% of the US market), this division generates strong cash flows for the company.

Looking forward,
the key driver of earnings growth will be the Biotherapies division, which manufactures and markets biological products, vaccines and pharmaceutical products.

Perhaps the most noteworthy product in its portfolio is GARDASIL, a vaccine for the prevention of cervical, vulvar and vaginal cancer. Royalties from international sales with respect to GARDASIL are expected to grow strongly over the medium-term, augmenting earnings growth.

An exciting wildcard for CSL is the utilisation of IntraVenous Immunoglobulin (IVIG) – a product of human blood that is derived from plasma – in the treatment of Alzheimer’s. Anecdotal reports suggest that patients treated with IVIG have recovered to where they were seven years beforehand. Given that it affects approximately 1.5% of the population in the US, demand could significantly overwhelm the supply side.

An attractive feature of CSL is that the bulk of its revenue is accrued in US dollars. Over the past decade, global equity markets have shown a tendency to being inversely correlated to the US dollar - that is, when the dollar goes up, markets goes down. In this regard, should worldwide equity markets take another battering, the profitability of CSL should actually increase.

CSL is in the upper echelon of profitable blue chips, with return on equity averaging in excess of 20% per annum over the past three years. In terms of safety ratios, net gearing is only 9% which stands the company in good stead regardless of the outlook for the global economy.

On our numbers for 2009, CSL is trading on 16 times earnings - a multiple I consider undemanding for a global franchise with a strong track record, excellent growth profile and defensive attributes.

While the dividend yield of 2% partly franked may be a cause for pause for some investors, CSL is a growth stock so I expect the dividend level to grow strongly over time.

Option writers can boost their income by an additional 5 to 20% per annum.

If you would like more information on CSL Limited (CSL) please call me on 07 4771 4577.