Report on CSL Stock Investment Analysis and Recommendations

This report provides an investment analysis of CSL, a biotechnology company listed on the ASX. It begins with an introduction to CSL, highlighting its market position and growth. The report then explores the company's specialization, the characteristics of its stock, and its suitability for different investor classes (growth-oriented and value investors). It analyzes CSL's financial performance, including revenue growth, return on equity, and dividend payments. The analysis delves into the company's management, valuation, and underlying demand for its products. Furthermore, the report identifies and assesses three key risks faced by CSL, including competitive pressures and the impact of new technologies. A 'BUY' recommendation is provided, supported by the company's strong market position and future growth prospects. The report concludes that while not risk-free, CSL presents a good investment opportunity.

[ Investment Analysis and Portfolio Management]
2019

CSL
Executive Summary
To ensure a strong wealth management it is essential that the chosen stock must
have credibility. The stock should have the attributes that should meet the needs of
the investor of various classes. In this report, the major onus will be on different
classes of investors. For this CSL that is listed on the ASX is selected. The report
initiates with the introduction followed by the specialization of the company and
specialization of the stock. The report further deals with concepts such as risk
involved in the stock and why CSL is a strong buy.
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CSL
Contents
Executive Summary............................................................................................................................2
Introduction..........................................................................................................................................3
Scenario...............................................................................................................................................3
a. Growth-oriented...........................................................................................................................3
b. Value investor..............................................................................................................................3
c. Reinvesting its returns................................................................................................................3
The specialization of the company and the nature of its stock.....................................................4
Determining the suitable stock for investment................................................................................4
Determination of the characteristics of the chosen stock..............................................................5
Three risks constantly faced by CSL................................................................................................6
 Risk 1............................................................................................................................................6
 Risk 2............................................................................................................................................6
 Risk 3............................................................................................................................................6
Graph of the Stock..............................................................................................................................7
BUY recommendations......................................................................................................................7
Conclusion...........................................................................................................................................8
References..........................................................................................................................................9
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CSL
Introduction
CSL has assumed a place of special importance in the industry with the presence of
34% of the antibody market and the biggest network of plasma collection center. It is
tagged as a pioneer when it comes to the healthcare division in Australia. The stock
has surged more than $180 for an overall return of 30% in a year. CSL is not averse
from the competition. The high quality of products together with the pattern of
investment in R&D has ensured the company a leading edge in the market. The
market for the company looks attractive owing to the huge investment made by the
company in the Global Hub.
Scenario
a. Growth-oriented
CSL is at least a century old organization now. Considering the records of the last
five years it can be said that the sales revenue of the organization has grown at a
pace of at least 6 percent every year and so are the profits. Organizations that report
a rise in its earnings every year have a strong probability of a strong customer base
and the demand for goods and services1. In this perspective, there is no doubt that
CSL is most likely to perform in the same manner in the years to come.
b. Value investor
In 2016, the company has seen to generate a whopping 48 percent return on equity
which is on average at least 10 percent more than the U.S. healthcare product
companies.
c. Reinvesting its returns
Since five years the company has been regular at paying dividends and the same
has increased with the rise in earnings. The company came up with buyback
1 Christensen, J, ‘Good analytical research’, European Accounting Review, 20(1),
2011, 41-51
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CSL
strategy so as to increase the value of the shares that were not yet purchased and
an investment of 1$billion shares have been made towards the same2.
To formulate the strategy of reinvesting returns one has to examine the following
factors elaborated below-
The specialization of the company and the nature of its stock
CSL is a company that operates globally. It is an organization that works into
biotechnology. The major products of the company are cell culture reagents,
vaccines, blood plasma derivatives and antivenom that are used in the research
work and manufacturing other medications. In other words, the company gathers and
transforms plasma into such products that helps in the clotting of blood. The plasma
is collected globally from various donor centers. This strikes a nation that the
company is engaged in manufacturing, R&D, and marketing of the goods so that
chronic illness can be removed.
Determining the suitable stock for investment
CSL obviously have chosen the best stock for investment and enjoys its ranking with
a market value of not less than 83 billion dollars which is way greater than National
Australia Banking Limited and Australia & New Zealand Banking Group. The
company was able to witness an increment in the EPS and provide high dividends.
Investors often consider making investments in companies that has a history of
strong and growing earnings for higher the earning capacity of the company higher
shall be the dividends declared3. The company also make huge investments towards
research and development so as to allow its products to be more effective. At
present, the company deals in altogether 37 different products which includes CSL
2 Hassan T, Michael, D & Mena L, ‘Derivatives Usage by Australian Industrial Firms:
Pre-, during and post-GFC’, Review of Economics & Finance, 11(1), 2017, 31-39
3 Yong, H, Hwa A, Faff, R & Chalmers, K, ‘Determinants of the extent of Asia-Pacific
banks' derivative activities’, Accounting and Management Information Systems,
13(3), 2014, 430- 448.
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CSL
112 and CSL 324 that are considered best for the treatment of patients suffering
from heart attacks.
Determination of the characteristics of the chosen stock
Management – in the past, the management of the company has taken a lot of
criticism against inflated earnings shown instead of being indebted. However, CSL
has still bloomed to become one of the leading organizations in its industry. In the
year 1997, the CEO of the company joined its predecessor. The CEO of the
company is serving his responsibilities for 5 years. Brian McNamee was the former
CEO of the company from 1990 to 2013. At present, Brian is also a board member of
the company. Most of the former experienced management of the company is still
retained owing to their understanding and knowledge about the same. This allows
the organization to deliver its best and achieve its long term goals4.
Growth Valuation – On account of the impact caused by the seasonal flu, CSL
delivered FX-adjusted EPS of $A3.16 in just the first half of FY 2018 and delivered
FX-adjusted EPS of A$3.88 in FY 2017. The company has estimated at least 20%
increment in its earnings which is close to 1600 million dollars. The company has
analyzed its EPS for 2018 at A$5.22 and EPS for 2019 at A$5.75. More than 31x
analysts have forecasted the turbulence in the company’s stock due to the probable
growth in its EPS in FY 20195. Considering the quality of the company’s business -
affairs it is definitely not that expensive.
Underlying demand- the demand for the company’s products are increasing and this
is owing to the business the company is engaged in. The need for core blood or
plasma therapy products is ever increasing in the healthcare domain. Even if the
governments increase their healthcare spends by 100 percent the requirements for
the same shall still be there6. CSL has always made sure that demand for its
4 Yong, Hue Hwa Au, Faff, Robert & Chalmers, Keryn, ‘Determinants of the extent of
Asia-Pacific banks' derivative activities’, Accounting and Management Information Systems, 13(3),
2014, 430- 448.
5 Mickelboro, J, Would Warren Buffett buy CSL shares? (2019)
https://www.fool.com.au/2019/02/17/would-warren-buffett-buy-csl-shares/
6
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CSL
products are always dealt appropriately with and there shall never remain any
shortage in supplies of the same owing to the kind of industry it is dealing in.
Three risks constantly faced by CSL
 Risk 1
As CSL happens to function in an industry where it faces average competition it is
easy for the company to analyze its profits margins or the shrink in its market share.
If the company is unable to function diligently in the future, there are high chances
for the same to suffer through losses and face terrible debt obligations along with a
rise in interest rates. Therefore, the company should always play safe and opt for a
balanced investment portfolio.
 Risk 2
The company is investing in FcRn which belongs to a new generation of antibodies.
The company believes that the FcRn supports the lasting of immunoglobulin which
will reduce the need to consume more antibiotics. So, if the need to consume
antibiotics will come down then automatically the demand for the same shall be
reduced and therefore, it is the companies and the overall industry that will suffer
 Risk 3
Alnylam Pharmaceuticals is one of the CSL’s competitors. It has come up with
Fitsurian, which is a gene therapy that helps in the clotting of blood and formation of
the protein thrombin. Patients suffering from hemophilia A and B and those who are
now in Phase 3 clinical trials can be healed with the help of Fitsurian as it will prevent
bleeding in such patients. This will influence the demand for clotting factor proteins
that CSL manufacture. This will disallows a lot of newcomers to enter in this
business. 90% of the industry is made up of just 3 companies7. Substantial fixed
7 Witcomb, G, CSL The bera case and why we arent worried (2018)
https://www.nabtrade.com.au/investor/insights/latest-news/news/2018/12/
csl_the_bear_casea
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CSL
costs indicate the revenues earned by CSLin tune to the variety of products that can
be extracted.
Graph of the Stock
Source: www.tradingview.com
BUY recommendations
The company has genuinely priced its products owing to the investments made by
the same in its research and development that reduces the manufacturing costs of
the products. For at least few years from now CSL shall not be able to break any
records. However, the company shall still be able to deliver the best and continue to
strongly position itself in its industry. The investors would still consider investing
further in the shares of the company owing to the lower risk bearing capacity of the
same8.
8 Eugene, B & Philip, D, Intermediate financial management (USA: Cengage, 2011)
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CSL
Conclusion
From the above discussion, it is clear that CSL cannot be tagged as a risk-free
instrument however, to comment its overvalued is not a difficult task. The
management is expecting a surge in the net profit by 10-14% in 2019. With the
presence of competitive advantages, a dominant market capture, economies of scale
and the presence of researchers of more than 1500 give an indication that it will
develop the products of the next generation. Considering the entire situation and the
future course of action it is a good bet in terms of buy.
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CSL
References
Christensen, J, ‘Good analytical research’, European Accounting Review, 20(1),
2011, 41-51
Eugene, B & Philip, D, Intermediate financial management (USA: Cengage, 2011)
Hassan T, Michael, D & Mena L, ‘Derivatives Usage by Australian Industrial Firms:
Pre-, during and post-GFC’, Review of Economics & Finance, 11(1), 2017, 31-39
Mickelboro, J, Would Warren Buffett buy CSL shares? (2019)
https://www.fool.com.au/2019/02/17/would-warren-buffett-buy-csl-shares/
Witcomb, G, CSL The bera case and why we arent worried (2018)
https://www.nabtrade.com.au/investor/insights/latest-news/news/2018/12/
csl_the_bear_casea
Yong, H, Hwa A, Faff, R & Chalmers, K, ‘Determinants of the extent of Asia-Pacific
banks' derivative activities’, Accounting and Management Information Systems,
13(3), 2014, 430- 448.
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