Treasure Chest: Market Misunderstanding CSL’s Power Of Four

This story features CSL LIMITED. For more info SHARE ANALYSIS: CSL

By Greg Peel

Biopharmaceutical company CSL ((CSL)) has long proven an enigmatic investment, not unlike Commonwealth Bank, in that investors have always loved it while stock analysts have long warned of overvaluation. Competition has long been the spectre in CSL’s case.

Yet if we look at a longer term chart for CSL, we see a stock that would always be favoured by the likes of respected Wall Street trader Dennis Gartman, in that the share price continues to “move from the bottom left to the top right”. Aside from a couple of bumps along the way, investors, by weight of numbers, have proven the analysts wrong.

To that end, fewer analysts have now stuck to a persistent “overvalued” mantra. CSL currently polarises broker opinion in that while there remain two Sell or equivalent ratings among those in the FNArena database, the six other covering brokers now rate Buy. There are no Holds.

Complicating the issue is a wide spread of broker valuations, even amongst the cohort of Buy raters. Having updated this month, Morgan Stanley (Underweight) has an $81.00 target while UBS (Buy) was leading the pack with a $105.50 target. Having last updated in the February result season, Citi (Sell) is the lower marker on $75.95 yet JP Morgan (Overweight) can still only manage $85.18.

No doubt those latter targets will be reviewed in August.

While CSL’s primary source of income and focus of most attention is its blood products business, ticking along in the background is a reliable yet unexciting flu vaccine business. Given flu is seasonal and the vaccine business has long been characterised by plodding 3% dose growth rate, any new news from the company with regard flu vaccines is usually met with a yawn from brokers.

Including UBS. Until now.

Back in October last, the UBS analysts joined with peers in failing to be inspired by CSL’s announced purchase of Novartis’ flu vaccine. The company was very excited about the earnings growth prospects this purchase implied, but analysts could not see what the excitement was about. UBS, for one, set its earnings forecasts for the Novartis contribution as much as 35% below those of CSL.

But for UBS, the penny has now dropped. The Novartis vaccine is “quadrivalent” when prior vaccines have been “trivalent”. In other words, the vaccine addresses four strains of flu instead of the previous three strains. While this implies 20-30% more effectiveness, the important point is that quadrivalent vaccines are priced at more than 50% above the price of trivalent vaccines.

It is no wonder, therefore, that CSL has joined its own global peers Sanofi and GSK in investing in quadrivalent vaccine, UBS suggests. The broker has now upgraded its earnings forecasts for CSL to be 6.6% ahead of the company’s FY17 estimates – being the first full year of contribution.

The market, says UBS, is not seeing it. The contribution from flu vaccine may be two years away but the analysts suggest it is worth $6 per share today.

The broker has lifted its target to $106.90 from $105.50, inching further ahead of the pack (consensus $94.45), and retains a Buy rating.
 

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