CSL: Result 2013

CSL has reported a pleasing full year result, with revenue increasing 10% to US$5bn compared to a year earlier after adjusting for currency fluctuations. Net profit increased 21% to US$1.2bn while earnings per share increased 26% to $2.44 due to the $900m spent buying back shares. An unfranked final dividend of 52c was declared (ex date 9 Sep), bringing the annual total to $1.02, up 18%. The current dividend yield is 1.6%.

Though operating earnings increased 19% to US$1.5bn and operating margins increased from 26.6% to 29.1%, there were some one off benefits. A new Chinese distributor bought a large amount of albumin to stock its shelves, for example, so the 28% growth in albumin sales should fall to 15% next year, which is still quite impressive for such a mature product.

CSL’s research and development (R&D) spending increased 16% to US$427m, more than the company earned in revenue just 15 years ago. R&D spending should increase 13% next year due to late phase clinical trials for several products.

CSL recently received approval from the European regulator to market its inventive long shelf life product Privigen direct to physicians. Privigen is designed to treat people with immune deficiencies and doesn’t require refrigeration. More importantly, Privigen also received the green light to treat an inflammatory brain disease known as CIDP. CIDP patients use significantly more immunoglobulin than the average patient and it’s the first time a CSL product has been approved to treat a neurological disease.

Until recently, most of CSL’s research and development has been spent improving existing products, finding new clinical applications (such as Privigen), or gaining approval in new markets. This has been a profitable and relatively low risk form of investment, and by 2010 it had already produced more than $1bn in profit from licensing fees alone.

Future spending will be designed to discover new products, including new treatments for haemophilia, which is much riskier. Success can produce windfall profits, but discovering the next revolutionary product can take decades (like cervical cancer treatment Gardasil) and there are no guarantees. CSL boasts a remarkable track record, and while we laud the company’s patient and long-term approach it will eventually need a few more hits to justify its current valuation.

With Brian McNamee – CSL chief executive for 23 years – recently retiring, Paul Perreault has taken the reins. Perreault joined CSL in 1997 and has held senior roles at the company‘s largest division, CSL Behring, since 2004. During Perreault’s tenure, CSL Behring’s earnings grew from $219m to $1.2bn and we’re confident he will maintain McNamee’s patient and shareholder friendly approach given his track record at Behring of producing highly profitable and innovative products.

The company is expecting earnings to increase 10% in 2014, and Perreault indicated that a new share buyback in the vicinity of $1bn would be announced. That puts the company on a forecast price-to-earnings ratio of 24. Given the company’s track record, pristine balance sheet and growth potential we’re prepared to see how the company develops under new management, but if the valuation increases much more we’ll consider selling. The share price has increased 12% since our last review on 13 Feb 13 (Hold – $57.24), and 98% since we initially upgraded the stock on 27 Feb 12 (Long Term Buy - $32.34). HOLD.

Note: The model Growth portfolio owns shares in CSL.