- CSL, a plasma and blood products business, has delivered excellent long-term performance for shareholders.
- Recent results saw 13% revenue growth and over 30% net profit growth.
- CSL is a rare combination of a defensive business that offers strong capital appreciation potential.
Australia is home to a few select high-quality gross businesses, and CSL Ltd. (OTCPK:CSLLY) may be amongst the top of the bunch. CSL is a plasma fractioning business that was privatized by the Australian government in the mid-1990s. Over the last 15 years, CSL has been an exceptional performer netting investors a compounded return of close to 27% per annum.
CSL's core business is in blood collection, fractionization and commercialization of plasma proteins and constituents derive from blood products. While this may not sound that 'sexy', it's a business with high regulatory barriers to entry and one that has significant compliance and execution challenges. That means that new competitors don't appear overnight, and that the industry essentially functions like an oligopoly.
There are only three players of meaningful scale, and CSL is the marketshare leader in the space. Baxter and Grifols are the other players in this cozy triumvirate. Together, they make up 90% of the plasma collection industry.
The market has traditionally been characterized by very limited price competition and discipline with respect to capacity. In many ways, the plasma collection industry operates in a similar manner to the mining industry where participants need to be disciplined and with respect to overcapacity i.e. too much plasma collection leads to lower prices and conversely, too little plasma collection means high prices can be attained at the expense of lower revenue. As the market share leader, CSL tends to be the volume control in the market and, if recent results are suggestive, has been doing a very good job.
CSL recently delivered results that showed revenue growth was up an impressive 13% year-over-year, not bad for a fairly mature business. Even more notable was that profit was up an impressive 35% year on year. CSL is also a very financially disciplined business that has significant pricing power.
Because derivative products from plasma are used to treat hemophiliacs and provide vitally needed albumin, if capacity is maintained, then pricing power results, leading to strong margins and sustained rates of return on both invested capital and equity.
CSL has maintained operating margins of greater than 20% in the last few years, which spiked up beyond 30% in the company's most recent earnings. CSL's returns on invested capital just show how much financial discipline management have. Returns on invested capital have generally been in excess of 20% for most of the last decade or more.
The outlook for CSL is positive. Plasma collection remains tight and the industry disciplined with respect to capacity. That likely means that revenue growth should continue to be buoyant and margins remain healthy. CSL demonstrated progress of its entry into niche speciality drugs with smaller populations but much higher margins than its core plasma business. Specialty products sales rose some 20% in CSL's most recent results.
An unexpected bonus for CSL may turn out to be its underperforming flu business, Seqirus. While Seqirus has been loss making for the past few year, there are signs that CSL management have been making progress to turn around this business. That may provide longer-term upside for CSL investors. Additionally CSL has a number of later stage drugs in the pipeline. Most notably, CSL 112 is a potential blockbuster cholesterol killer, which has the potential to 'suck up' bad cholesterol and reduce the incidence of repeat heart attacks.
CSL has had a strong run in recent times. Its share price is up more than 40% over the last 1 year, and more than 16% since the start of the year. The stock currently trades at a forward PE of almost 35x earnings. While the price is currently a little too rich for my liking, this is a high-quality business that would make a high quality defensive growth holding for any investor.
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This article was written by
I am an investor who is focused on disruptive businesses that are transforming industries lead by visionary leaders with substantial skin in the game. I have spent nearly 20 years in a formal capacity in various investment banking and corporate advisory roles, having attained my MBA with a concentration in finance. This led me toward a path in Venture Capital and working with entrepreneurs building new technology businesses, and I have had the opportunity to not only invest in a number of amazing privately held businesses, but also play a meaningful role in growing several of these early stage enterprises as well. I am now focused on applying my lens of private market disruption and leveraging secular tail winds to the public markets. This was a journey which I started with my public Project $1M portfolio series and which I have deepened with my marketplace service, Sustainable Growth
Analyst’s Disclosure: I am/we are long CSLLY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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