CSL: The answers
Since listing in June 1994, the performance of CSL (ASX: CSL) has been nothing but spectacular, with the stock ultimately growing into the ASX200's largest constituent, beating the far more familiar household names of Commonwealth Bank (ASX: CBA) and BHP Billiton (ASX: BHP).
It took the better part of the past 2.5 decades, but Australian investors eventually warmed to Australia's largest and most successful biotech company, even though it never offered a genuine "yield" to get excited about and the valuation never looked "cheap".
But CSL performed when others couldn't, and it kept on simply doing that, until the global pandemic and calendar year 2020 arrived.
Just when it seemed nothing could ever possibly go wrong for Australia's number one business success story, it somehow did.
While the Australian share market has enjoyed one of the strongest bull markets in living memory, the CSL share price has sagged, clocking up its worst relative performance since the IPO 26 years ago.
Below is an attempt to explain the "why" behind this remarkable turn of events. More than a simple company-specific expose, it might as well be treated as an informative and educational vivisection of the share market in general, and the past twelve months specifically.
Answer #1: No More Buyers Left
Can an investment ever become too popular?
In overseas markets, particularly in the US, teams of quant analysts are regularly sifting through fund manager statements, drawing up rankings for popular ownerships in an attempt to determine which stocks are over-loved and which ones are temporarily under-owned. Such insights might prove pivotal when exploring the next trading opportunity.
The situation of CSL in Australia is somewhat different.
For most of its ASX-listed existence, the stock did not feature prominently on many active funds managers' radar. Too expensive, would be the standard response for a long while, in particular during the years of Commodities Super Cycle and strong outperformance from the Big Four major banks.
And frankly, CSL as the topic of conversation among retail investors was simply non-existent. No yield. A high valuation. A complex science and investment-based business model. Predominantly active in overseas markets.
Who in their right mind would possibly invest in it?
Meanwhile, CSL shares kept on rising through the local rankings. Member of the ASX200. Then followed the ASX100, the ASX50, the ASX20, the Top10, the Top5.
Nothing grabs the attention of investors as much as a steady and persistent outperformance, and the fact CSL grew ever more important for the local index meant the business and its share price were consistently outperforming the broader market, in particular near the top where it counts.
On my observation, things started to change in 2016, maybe 2017. Public conversation shifted from "expensive" to "you pay up for quality" and more and more investors, both professional and retail, joined the fan club.
What helped growing enthusiasm was that CSL shares kept on keeping on. First past $100, then $200, and even $300 was not a bridge too far.
By late 2019, a local survey among investors put CSL up as a must-own stock for the second year in a row. In hindsight, it was then I started to feel a little less comfortable. But, of course, as soon as markets entered 2020 and the global pandemic hit, no such doubts seemed valid with the CSL share price, true to its form and reputation, surging as high as $339.14.
What happens when everyone is on board with a guaranteed good thing? It means there are no logical buyers left when money starts shifting elsewhere. So, when parts of the investment community started to concentrate on greener pastures elsewhere, there was no money on the sideline waiting for the opportunity to get in.
In fact, that money on the sideline last year was very much looking elsewhere because the opportunities to be had were of the once-in-a-lifetime kind, leaving early safe havens and outperformers like CSL hanging high and dry.
To answer today's first question: there most definitely is a danger with having convinced the last of the sceptics, as share prices need a marginal buyer to provide natural support.
That marginal buyer was not around, or had other interests, when the CSL share price pulled back from its all-time high last year.
Answer #2: It's All Relative
Most share market analysis focuses on company-specific features (bottom-up) or starts with a macro view (top-down), but both omit the fact that relativity is equally important in the share market, in particular during times of extraordinary circumstances and a heavily polarised asset spectrum.
Why would an investor buy into 4% yield when 5% is still on offer? Why buy into a stagnant business when plenty of growth is around? Why hold on to a falling share price when so many others are trending upwards?
The rise of CSL's popularity stems to a large degree from the fact most old economy stalwarts on the ASX were starting to be challenged in their growth path, and many local management teams (and boards) did not have a ready-to-be-executed answer or response.
Yes, the past five years have thrown up multiple tech success stories including Afterpay, Altium and Xero (sorry, New Zealand), as well as a2 Milk (sorry again), Lovisa Holdings, and Netwealth but at the top, where most institutions allocate their funds, the Australian landscape gradually turned grey and bleak.
From banks to insurers, to property developers and shopping mall owners, not to mention energy companies, utilities and miners; all revealed their weaknesses when confronted with a low growth, highly disruptive environment and only a few large cap companies in Australia managed to offer sustainable, consistent and reliable growth. CSL was one of those few.
As happens elsewhere: what becomes rare but remains in demand will receive a big reward. Hence the shift in market attitude: CSL is not expensive, it's of rare quality, and that deserves a premium.
Of course, the Big Reward came about one year ago when most stocks in the market got smashed amidst panic, forced selling and the threat of a global pandemic.
While low-quality cyclicals, small caps and cash gobbling business models de-rated by -50% and more, shares like CSL found new friends who pushed up the share price onto a new all-time high.
But now that dynamic has changed and those prior castaways are offering potential growth of 50% and more, plus in some instances the return of shareholder dividends.
By now the over-ruling question has become: why holding on to a company that only offers little growth, with no yield, while I can get both in spades elsewhere? Many investors don't spend five seconds thinking about it.
Answer #3: A Parasol Or An Umbrella?
The importance of relative comparisons is firmly backed up by history. In simple terms: when it rains everybody starts looking for an umbrella, but as soon as the sun shines the race is on to secure an umbrella on the beach.
CSL is a big, sturdy, dependable umbrella that keeps us dry during times of heavy weather, but it's not a parasol.
Twelve years ago, when four years of synchronised global economic growth came to naught and disintegrated into the Global Financial Crisis, CSL shares went into the quagmire priced in the mid-$30s. It came out the other end at around the same level.
It was a truly astonishing result considering the broad market sank more than half in value, with banks and resources stocks faring a lot worse.
However, 3.5 years later CSL shares were still battling to stay above $30. Nobody wants a high-quality umbrella when the mindset is: let's go to the beach!
Answer #4: Aussie, Aussie, Aussie!
Sometimes the odds are stacked in your favour, and multiple narratives merge into one giant support for the share price, and sometimes the exact opposite happens.
Once central bankers had found a way to pull the world out of the fraudulent mess created by the US financial industry, global optimism was awakened and this pulled the Australian dollar to parity and beyond against the greenback. AUD/USD at 1.13. Remember those days?
Those were also the days that local exporters and profits derived in foreign currencies had a giant mountain to climb. No surprise, the local healthcare sector remained out of favour while the Aussie dollar enjoyed its moment in the sun. Once AUD/USD had peaked in 2012, the CSL share price started moving upwards.
Today's situation is not as extreme, but important nevertheless. AUD has quickly risen from below 0.60 to near 0.80. The move since the start of 2021 has been from circa 0.70 to, say, 0.77. That's a 10% increase. In three months.
At its lowest point two weeks ago, the CSL share price was down in excess of -13% when measured from the start of the calendar year.
Every analyst who has investigated historical correlations will confirm during times like these, CSL shares and the Aussie are very much intertwined with each other, as direct opposites.
Answer #5: My Name Is Bond, Not 007
Never witnessed anything like it before. Ever. Such was the mood of veteran asset managers and professional investors in late 2019.
Share markets, including here in Australia, had become gripped by extreme polarisation whereby winners kept on winning and laggards never seemed to attract anything but temporary attention from investors.
The result was a valuation gap most had never witnessed in their active careers. Then came the dividend cuts in Australia, followed by the global pandemic, and that relative valuation gap between winners and laggards blew out further to an extent that could not possibly be sustained.
The elastic band between Growth and Value has narrowed considerably, as should be expected, but what really got the momentum switch into acceleration was the advent of ready-to-use vaccines plus rising yields on government bonds the world around.
Before long, the global narrative morphed into "inflation is coming". Investors buy protection through energy, financials and cheaply valued cyclicals.
They reduce exposure to technology and highly priced quality and growth stocks. Again, CSL finds itself on the wrong side of market momentum.
Answer #6: Covid Is Kryptonite
Very few contest the fact CSL is one of the most successful and best managed companies on the local bourse, but just like Superman is weakened by Kryptonite, the covid-19 virus spreading throughout the USA still is preventing donors from visiting plasma collection centres and this is weighing down the global plasma industry, of which CSL remains the most efficient operator.
Because there is a lead time of approximately nine months, today's below-trend industry collection data will weigh upon growth numbers in FY22. While nobody expects the current situation to remain in place forever, the market is waiting for concrete evidence the industry is picking up.
CSL has the advantage of operating the world's second largest virus vaccine business, which is booming and thus offering a natural offset, but investors understandably want to see improvement in the largest and core part of the business.
Pre-covid, CSL was operating the largest and most efficient global network of collection centres while also investing most in additional capacity, grabbing the lion share of annual industry growth, but these advantages don't count for much when supply remains under pressure.
And so we wait. For the Biden administration to successfully roll out vaccines. For life without lockdowns. For industry collection data to signal the worst is in the past, and growth in plasma collection is returning.
Answer #7: Fear Is Stronger Than Fact
Does anyone remember when Amazon was coming to Australian shores? And how did that work out for local retailers such as JB Hi-Fi ((JBH)) and Harvey Norman ((HVN)), or for a direct local competitor such as Kogan.com ((KGN))?
The most insightful answer probably comes from Booktopia ((BKG)) which listed late last year but would never have been able to IPO in the year leading up to Amazon's arrival. Yet, here we are, with Booktopia reporting record growth and with both company management and analysts forecasting ongoing strong growth numbers for the years ahead.
Admittedly, the Booktopia share price hasn't exactly performed strongly post the initial fresh listing excitement, but there are many factors in play, and it remains early days yet to make any sort of firm judgment.
Meanwhile, JB Hi-Fi shares recently set a fresh all-time record high, while Kogan shares did so last year, and Harvey Norman -believe it or not- is finally closing in on the all-time high reached in 2007 (pre-GFC).
A similar fear has gripped parts of the investment community regarding a potential new class of drugs that might impact on sales of immunoglobulin (Ig), which is the bread and butter for the likes of Grifols in Spain, Takeda in Japan, Octapharma in Switzerland, and CSL in Australia.
Without getting lost in healthcare techno-lingo, US-based biotech argenx is currently trialling a FcRn drug for Chronic Inflammatory Demyelinating Polyneuropathy (CIDP), and showing great promise. CIDP is a rare condition with only 40,000 patients being treated annually, but it does account for circa US$3bn of the US$12.8bn of global annual Ig sales. In other words: a highly successful argenx market entrance can potentially put a big dent in the plasma industry's annual sales.
This is probably where the comparison with Amazon meets the reality of every day life inside hospitals and the healthcare industry in general. For starters, argenx is currently the front runner for this new industry but, assuming everything works out well from here onwards, a genuine competitive threat might not be seen until a number of years from today.
A recent industry study by Credit Suisse gives a successful argenx FcRn product launch a 70% chance by 2025 with an estimated peak potential of US$1.2bn in annual sales years later. This remains less than half of the current US$3bn in annual Ig sales that would be affected.
Not surprisingly, Credit Suisse analysts believe market fears about this new upcoming threat look "too pessimistic". On Credit Suisse's assessment there is no shortage in demand, hence Ig lost to FcRn will simply find a customer elsewhere.
Others have expressed similar views and forecasts, while not necessarily having conducted a similar survey of US neurologists to produce an in-depth industry report in the same fashion as Credit Suisse did. Grifols' share price since January 1st looks quite similar as CSL's.
Argenx is not the sole competitor aiming to make an impact, not by the slightest. Takeda, and others, have been cranking up competition in so-called Specialty Products; high margin, strongly growing market segments. Local analysts, in response, have been scaling back their growth projections for CSL in coming years.
The bottom line remains the same, however, and this is that CSL will very much continue growing its business, profits and dividends in the years ahead, occasionally impacted or interrupted by external factors such as currencies, government policies and competition.
Which is why I believe last week's upgrade to Outperform with a twelve months price target of $315 might prove quite the pivotal event for shareholders and investors in the company.
Following their recent industry study, Credit Suisse analysts have positioned their CSL EPS forecast for FY22 -11% below market consensus, but still decided to upgrade the stock.
The difference, say the analysts, between a base case scenario for Ig sales and the bear case scenario is between 10% growth per annum and 7% growth per annum between 2025-2030.
Credit Suisse's updated projections imply CSL will report negative EPS growth in FY22, followed up by a strong, double-digit rebound in FY23. History suggests such an outcome looks but plausible. But as today's expose shows, it ain't the only factor impacting on the share price, not by a long stretch.
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