PORTFOLIO POINT: CSL’s growth prospects and dominance over its global peers make it an attractive investment, particularly to those bearish on the Aussie dollar.
The rising Australian dollar against the US currency and the recent strength of Wall Street makes all investors wonder whether they shouldn’t take advantage of our high currency and increase their exposure to international markets.
I think most portfolios should have exposure to international markets, although we have a currency that is being equated with gold at the moment, which limits the returns from offshore investing.
Nevertheless, we all know that if something were to go wrong in China or a global catastrophe occurred elsewhere, our currency would be among the hardest hit, so investments overseas should be part of a risk-hedging strategy.
But almost invariably, you end up buying a fund rather than a set of individual stocks. So today I want to view that international strategy in light of a company that is close to being the most successful non-mining Australian company to have ventured abroad.
I am referring, of course, to CSL. CSL chief executive Brian McNamee took a tiny government organisation, which was about to privatise, around the world and CSL became the biggest global player in blood plasma products. Normally when a company undertakes that sort of enormous growth it goes through a period of gasping for breath while it settles everything down. There were signs that CSL was doing just that in the last year or so (Brian McNamee would disagree). But in the latest half year, CSL has entered an entirely new growth phase and is increasing its sales substantially above the rates recorded by its global competitors.
Moreover, it is breaking into markets in China, Russia and Brazil, which open the possibility of a whole new set of growth paths for the group. All this has been concealed by the rising Australian dollar, given that most of CSL’s earnings are either in Swiss francs or American dollars.
And so in the first half year, CSL’s net profit after tax was down a fraction as a result of our higher dollar and a few one-off events. But on a constant currency basis, earnings grew 16% and, taking out the one-offs, earnings per share were up 18% on a constant currency basis.
The CSL business is quite remarkable. The company collects blood around the world but particularly in the US, where people on lower incomes donate blood for money. That blood becomes the raw material for a series of medical products which are showing considerable global growth. In the half year, the group’s intravenous immunoglobulin (IVIG) blood products grew 24%: Albumin grew 17%; Helixate grew 8%; and a group of specialty products that are being developed grew 27%.
For the last four years, CSL’s revenue has been growing at 12.8% compared to its competitors’ growth of 10%. The company remains in a growth market and is outperforming its peers – a remarkable achievement for a company based in Melbourne, Australia that has had only one CEO since floating.
The group invests heavily in research and writes most of that research off against its profit. If it followed other drug companies, it would capitalise much more of its research, which would boost earnings per share. In 2010-11, CSL’s earnings before interest, tax and depreciation (EBITDA) were $1.356 billion and research totalled $325 million. Heavy CSL research investment is now beginning to pay off with new products coming onto the market, which is one of the reasons the specialty products grew so strongly.
CSL is, of course, an enormous cash powerhouse, generating some $1.1 billion in 2010-11. Macquarie Bank expects this figure to rise to $1.3 billion in 2013-14. CSL’s EBITDA to sales exceeds 30%, so it is a high-margin business. The company buys back its shares on a regular basis. You will see from the graph below that a few years ago, the market rated CSL as one of our growth stocks, but the combination of the higher Australian dollar and perceived growth exhaustion meant the shares got ahead of themselves and fell from $41 in 2009 to $27 last year. They are now about $32.50 and are clearly on a rising path. Next year, the company plans to follow mining companies such as BHP and state its profits in US dollars, which will probably help its sharemarket rating, although it is a pain for Australian investors who invest in Australian dollars.
CSL is one of a few Australian companies with clear market growth operating on the international stage. Like any drug company, there is always the possibility of an error in processing which causes faulty product to get into the system. If that ever happens, its shares will be marked down sharply and this represents a risk that all investors need to understand. According to Macquarie Bank, CSL’s adjusted earnings per share are set to rise from $1.73 to $2.42 by 2013-14. This is a strong increase and if CSL achieves anything like that rise, then its shares will continue to surge. Of course, if in some time in the next two or three years there is a big fall in the Australian dollar, then CSL shares will go through the roof.