Healthcare heavyweight CSL delivers bloody good result

There's plenty of uncertainty engulfing economies and financial markets at the moment. Inflation, higher interest rates to fight inflation, and the lower economic growth which generally follows. It seems there's only bad news on the horizon!

Well, whether central banks can pull a monetary policy miracle out of their hats – i.e., the fabled "soft landing", one thing is for certain. People are going to keep getting sick and there are going to be companies which stand to profit.

The healthcare sector has long been considered by investors to be the most "defensive" sector on the stock market. This is because through thick and thin, this sector's earnings have remained relatively stable compared to other, more cyclical sectors. 

Investing in high quality healthcare stocks during times of uncertainty is a strategy which has served investors well over the long haul. Fortunately, Australian investors have access to some of the highest quality healthcare companies in the world. As in, a handful of globally significant enterprises which are absolute leaders in their respective classes. 

In this article, I will provide an overview of the progress of my favourite ASX-listed healthcare company, CSL – perhaps the ultimate defensive stock – as I review its most recent first half FY23 result.

Australian born CSL is one of the largest biotechnology companies in the world. It operates through three major segments:

CSL Behring
Blood plasma therapies aimed at treading rare and serious diseases including bleeding disorders, primary immune deficiencies, and Alpha 1 proteinase inhibitor deficiencies. To obtain the plasma, CSL operates a global collection network with over 300 collection centres in the US, Europe, and China. 

CSL Seqirus
Production of non-plasma biotherapeutic products and develops influenza related products. In short, CSL's vaccine arm.

CSL Vifor
Recently acquired Vifor is a global leader in drugs and treatments for iron deficiency and nephrology. 
 

Scorecard B+
Overall, CSL delivered a strong result in the first half of FY23. It's underlying profit of US$1.82 billion was up 10% on the previous corresponding period (PCP) as revenues rose an impressive 25%. Record plasma collections (up 36% vs PCP and now about 10% higher than pre-COVID levels) drove the Behring performance, however, continued higher costs of collections crimped margins more than expected to 49.1%, less than the 51.5% the market was expecting.

Seqirus remained solid, posting high-single-digit-growth despite cycling some tough comparables as the demand for flu vaccines in a post-COVID environment tails off. Newly-acquired Vifor is finally starting to contribute to the CSL bottom line and also logged an impressive 15% increase in sales and US$889 million in revenue.

Looking forward, CSL notes HEMGENIX, the first gene therapy for haemophilia B, was approved by the FDA in the US and recommended for approval in Europe by CHMP. Marketing and sales should commence in the US in H2.

Management offered a bullish outlook for Behring, noting "the strong growth we have seen in plasma collections and our immunoglobulins franchise is expected to continue". They also noted Seqirus would be profitable overall despite a loss in the second half of the year due seasonal factors. Finally, they confirmed the Vifor integration was on track and was delivering on synergy objectives. FY23 underlying net profit guidance for FY23 was re-affirmed to be in the range of $2.7 billion - $2.8 billion.
 

Did you know CSL pays donors for blood collections in the USA? Record unemployment in the US has caused a reduction in the number/motivation of donors, and therefore CSL has had to offer higher collection fees to entice them back. These higher collection fees have been a major drag on CSL's profitability. 

The H1 FY23 result was "only" a B+ in my opinion due to the deterioration of Behring's margin. Management suggests this deterioration is likely to back out as CSL reaps the rewards of major investments in its collection centres over the last couple of years and as product supply improves in a post-COVID environment. 

However, the major X-Factor for CSL in the near future, and what I feel could be the key driver of better-than-expected earnings in the next 12-months, is the prospect of a sharp deterioration in the US economy. Yes, a recession in the USA is good for CSL! 

If the US economy slows sharply because of the Federal Reserve's recent interest rate hikes, and as a result US unemployment rises, this would likely be a major positive for CSL's. Plasma collections would likely spike, and costs of collections would likely drop – thus delivering a potential earnings boon for CSL. 
 

CSL is a high-quality, blue-chip company which could potentially be an excellent counter-cyclical play to add to your portfolio. Let's now consider whether CSL stacks up on valuation and technical grounds.

Valuation

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The growth outlook is favourable for CSL as Behring continues to recover and the full earnings and synergies from the Vifor integration are realised. The FY23 PE of 38.2 times appears high (expensive) on first pass, however, look at that 3-year compound annual growth rate (CAGR) of 20%. That's close to triple the market average, and certainly sufficient to justify CSL's current valuation plus a little more if we assume a target PE of 27.5 / Low Risk rating.

My fair value target is $327.56 which allows for +10.5% upside (based upon the Feb 28 close when this analysis was conducted). Add in an expected dividend yield of 1.2% 5% franked, and the valuation implies a possible 12-month total return of close to 12%.

Looking at the broker consensus for CSL, we can see coverage by 15 brokers: 3 Strong Buys, 12 Buys, 1 Hold, and 1 Sell. Overall, the consensus rating is a BUY. The brokers' average price target for CSL is $333.72 which allows for 12.6% upside from the Feb 28 close. Their highest target price is $352, and their lowest target price is $248.35.

Technical Analysis



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The CSL chart shows a developing short-term downtrend (amber ribbon) within an established long-term uptrend (dark green ribbon). This suggests HOLD, and not ADD at this stage.

To upgrade CSL to an ADD, I would need to see at least a few strong demand-side candles at or above the long-term trend ribbon. Demand-side candles are those with long bodies (i.e., the box part of the candle) and/or long lower shadows (i.e., the line part of the candle). 

Preferably, also, the short-term trend ribbon reverts to up (light green) and/or the price action reverts to higher peaks and higher troughs.
 

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