No Talecris No Reason To Be Negative On CSL

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

The company is included in ASX20, ASX50, ASX100, ASX200, ASX300 and ALL-ORDS

By Chris Shaw

For several months the potential big upside case for blood products group CSL ((CSL)) has been its proposed takeover of Talecris in the US as this would give it a strong competitive position in that market as well as delivering significant cost synergies and driving what is already a healthy earnings growth outlook.

But the reality appears the deal will not be allowed to proceed as commissioners at the Federal Trade Commission (FTC) advised FTC staff had recommended against the proposal. As UBS notes, while CSL could go to court to appeal the ruling it appears unlikely anything can be done to make the FTC change its mind on the deal.

The immediate downside of the deal failure is CSL will be required to pay a US$75 million break fee, while longer-term there is the missed opportunity of not being able to bring Talecris and the synergies plus market position it brings into the company’s fold.

To reflect this those brokers that had included Talecris in their earnings forecasts for the group have been forced into revisions, with Macquarie for example lowering its earnings per share (EPS) estimates by almost 9% in 2010 and nearly 7% in 2011.

As well, the Australian dollar has been strengthening against the US dollar in recent weeks and this poses an additional earnings threat, Deutsche Bank estimating the currency’s appreciation could cut into FY10 earnings per share by as much as 13%.

Given the changes, broker price targets have come down, the FNArena database showing an average price target on the stock now of $40.51, down from $41.42 prior to the FTC announcement. As examples, Credit Suisse has lowered its target to $38.00 from $43.00, while JP Morgan’s has come down to $36.90 from $39.15. There could still be further adjustments as Bank of America-Merrill Lynch has yet to update for the FTC news and it is the high marker in the database with a target of $48.80.

But while price targets are coming down, brokers remain positive on the stock, as evidenced by the fact there hasn’t been a single rating downgrade post the FTC decision. There are a couple of reasons for this, the first being strong earnings growth is still expected for the company in coming years.

As an example, JP Morgan notes conditions in the plasma industry remain strong and this offers some upside risk to its estimates, as does the potential of the company’s clinical trials to deliver new markets for its products such as the early indications IVIG is proving to be beneficial for those suffering from Alzheimer’s Disease.

The broker is forecasting EPS of 172.9c this year and 186.3c in FY10 but sees some potential upside risk to these numbers, while UBS is expecting EPS of 177c and 201c, Credit Suisse is at 186.8c and 225.9c and the FNArena database shows consensus numbers of 173.7c and 212.4c respectively.

The other positive is assuming the Talecris proposal is finished, the company is likely to look at capital management initiatives, with a large buyback the favoured option. UBS estimates a buyback of as much as $2.5 billion is possible and at $30 per share this would add 12% to EPS estimates for FY10, while on JP Morgan numbers a $2 billion buyback at $35 per share would see the company growing EPS by 18% in FY10 and 11% in FY11.

JP Morgan suggests this is strong growth in the current economic environment and it makes the stock attractive at just over 15x earnings in FY10. As a result, JP Morgan has retained its Overweight rating on the stock, a rating matched by Credit Suisse given on its numbers the multiple is 14.5x for next year. Overall the FNArena databse shows eight Buys and two Holds.

CSL remains one of the most highly rated stocks in the Australian share market (see also the June edition of the Australian Super Stock Report released this week and available on the FNArena website).

Shares in CSL today are little changed in early trading and as at 10.40am the stock was up 1c at $30.36. This compares to a trading range over the past year of $26.85 to $41.97.

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