The latest of my “Never Sell stocks” is one of Australia’s true global leaders, CSL Limited (ASX: CSL).
CSL was founded as Commonwealth Serum Laboratories in 1916 and was actually part of the Federal Government at the time.
CSL is a biopharmaceutical company that researches, develops, manufactures and markets products to treat and prevent human medical conditions including coagulation (blood) disorders, viral and bacterial diseases, bleeding disorders and other diseases.
The operational businesses include CSL Behring, which focuses on the manufacture of blood plasma and bioCSL, which is centred around influenza vaccines. CSL has manufacturing operations in the United States, United Kingdom, Germany, Switzerland Bern and Australia in Parkville and Broadmeadows.
CSL is one of three in a $24 billion industry
CSL is one of three of the main players in the global blood plasma sector, which is a $24 billion industry and represents some 50% of CSL’s revenue. Its dominant position means CSL operates with formidable power, scale and low manufacturing costs making it difficult for competitors to replicate their margins. The acquisition of the Seqirus influenza division means CSL is the second-largest global player in that sector.
CSL continued its incredible performance in 2019, bucking negative sentiment to deliver a ‘weaker’ result of 11% revenue and profit growth to $1.25 billion. The company’s dominant position affords an incredible profit margin of 58%, which is met with cash flow conversion nearing 100% of profit.
The biggest highlights from CSL’s result were from its core immunoglobulin or blood treatment drugs, demand for which increased 28% and 37% respectively, boosted by more approvals and alternate uses being found. This group of treatments represents close to 50% of revenue.
CSL’s influenza division, an acquisition questioned by analysts, continues to pay off as revenue grew 9% for the first half of 2020. A portion of this revenue related to pandemic treatments, but unfortunately not a vaccine for COVID-19. The Albumin treatment, again hard for finance educated people like myself to understand, was the weakest performing division, falling 33%. However, this was due to a change in approach to expanding into the Chinese market, as CSL made the decision to supply direct rather than rely on domestic distributors.
CSL’s COVID-19 resilience
CSL seems to deliver year after year. Even amid this Coronavirus volatility, CSL has managed to deliver a positive return for the quarter.
The company’s state-of-the-art production facilities combined with their extensive blood connection network place them in a monopolistic position within their core market and management is investing further to consolidate their dominance.
There are huge barriers to entry for new entrants. The industry is very capital intensive, so it is simply a matter of ensuring they provide a consistent and reliable service to hospitals and the Government to maintain or grow market share. The company’s expansion into emerging markets is only just beginning and if successful will take the profits and scale of the business to another level.
CSL has been able to consistently generate substantial revenue and earnings growth by dedicating up to 10% of revenue each year into research and development, that’s around $900 million.
The company is not without risk, however, with recent strength potentially covering off a weaker period of blood plasma collection in the US, especially as social distancing measures increase. That said, this may see some short-term volatility in CSL’s share price, which would only make for an attractive entry point for a true Australian and global leader.