Too Early To Buy 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

– Morgan Stanley rates CSL as Equal-weight (sector: In-Line)
– Too early to turn more positive given potential earnings uncertainty
– Consensus estimates may be too high in Morgan Stanley's view

By Chris Shaw

Earlier this week Macquarie upgraded their view on blood products group CSL ((CSL)) to Neutral from Underperform. The upgrade followed recent share price weakness, which in Macquarie's view has left the stock at fair value levels.

Macquarie's lift in rating removed the only negative recommendation on CSL in the FNArena database, the stock now scoring three Buy ratings and five Hold recommendations. 

Today, Morgan Stanley agrees with the dominant view it remains as yet too early to be a buyer of CSL, suggesting at current levels the stock remains "marginally expensive". Morgan Stanley rates CSL as Equal-weight within an In-Line view on the Australian Pharmaceuticals sector.

The stockbroker has a price target for CSL of $31.16, which is below the current share price. This target compares to a consensus target according to the FNArena database of $37.52. Targets in the database range from Macquarie at $31.30 to UBS at $44.00.

In Morgan Stanley's view, to justify a more positive view implied by a 10% return relative to the current share price would suggest a closing price of around $36.30. Depending on the valuation methodology used, achieving such a share price would require either a fall in the AUD/USD rate to a range of US84-93c, or a 12-20% reduction in the number of shares on issue.

The Australian dollar has been volatile of late against the US dollar but continues to trade well above par and while Macquarie expects a share buyback from CSL in coming months and sees this as potentially improving the returns on offer, a buyback of the magnitude suggested by Morgan Stanley is unlikely.

As well, in Morgan Stanley's view there remains some downside risk to earnings estimates for CSL in FY11/12, especially from the pd-coagulant franchise and from ongoing strength in the Swiss franc relative to the US dollar. 

The latter in particular may not be fully factored into market earnings forecasts, notes Morgan Stanley. Given this implies some risk to earnings, the broker suggests the shares appear too high at current levels given a forecast FY12 earnings multiple of 17.7 times. 

Macquarie's estimates suggest a 15.8 times earnings multiple for FY12, though some risk to forecasts is evident. As Macquarie notes, positive news on Baxter's Alzheimer's trial could add 5% to earnings, but on the flip side any aggressive discounting by Octapharma when the company returns to the market could have a 7% negative impact on earnings. 

Others in the market are more positive, as earlier this month both Citi and UBS reiterated Buy ratings on CSL. This was despite a warning from the FDA in the US some of the group's production processes are not up to standard. In Citi's view, the problem should be fixed with minimal impact on earnings.

Shares in CSL today are weaker and as at 11.25am the stock was down 40c at $32.66. Over the past year CSL has traded in a range of $30.57 to $38.07, the current share price implying upside of around 15% to the consensus price target in FNArena's database. Price targets are mostly set in the mid-$30s, with UBS and JP Morgan well-ahead of their peers with their targets of $44 and $42 respectively and with Macquarie ($31.30) and Deutsche Bank ($33) representing the lower end of the range.
 

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