Could CSL Disappoint On Expectations?

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

In the FNArena database CSL ((CSL)) scores eight Buy ratings out of a possible ten along with two Hold recommendations, which clearly indicates most of the market sees good value in the stock at current levels even allowing for the disappointment of the company having to abandon its takeover bid for US group Talecris.

Much of this is based on expectations of strong earnings growth in coming years, with consensus forecasts in the database showing earnings per share (EPS) forecasts of 171.6c this year and 207.9c in FY10, which represents growth in earnings of 14.7% and 21.2% respectively from the almost 150c the company earned in FY08.

One broker not so bullish is Morgan Stanley, who rates the stock as Equal-weight, reflecting its view there is scope for earnings to fall a little short of market expectations next year in particular. There are a number of factors potentially playing on earnings according to the broker, and while this would ordinarily be enough to generate an Underweight rating in CSL’s case it sees the current share buyback as supporting the share price shorter-term.

One area of concern for earnings is with respect to the exchange rate, the stronger Australian dollar meaning less of a translation benefit from earnings generated in the US. Having shifted from using FY09 forecasts to the spot rate the broker has consequently adjusted its numbers lower.

Also the broker is cautious on the outlook for Gardasil as it sees scope for royalties to decline rather than grow as market consensus suggests, while it has also downgraded its Privigen sales expectations from 13 million grams to 10 million grams given an expectation of some problems in transitioning IVIG uses onto Privigen.

The other cause for concern according to the broker is the group’s current plasma supply agreement in Australia is up for renewal at the end of this year, which it sees as adding to the scope for earnings to disappoint. To reflect this the broker is forecasting EPS of 173c this year but just 187c in FY10, well below consensus.

While there is a potential positive for earnings from the company delivering a vaccine for H1N1, the broker points out it has already factored this into its model. Reflecting its lower earnings forecast for FY10 the broker’s price target is also well below consensus at $30.68, compared to an average target according to the FNArena database of $36.39.

Shares in CSL today are slightly weaker and as at 2.20pm the stock was down 7c at $32.08. This compares to a trading range over the past 12 months of $26.85 to $41.97.

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