Australia | Nov 28 2012
– CSL surprises with earnings guidance upgrade
– Brokers adjust forecasts and price targets
– Signs momentum may extend into FY14
– BA-ML upgrades to a Buy
By Chris Shaw
Blood fractionator CSL ((CSL)) surprised the market yesterday with an upgrade to FY13 earnings guidance, the company now expecting constant currency net profit after tax growth of 20%, up from 12% previously.
As JP Morgan notes, around 50% of the upside is due to improving sales growth and a better sales mix. Given a recent 2% price increase on Privigen sales in the US had already been anticipated, the broker suggests the mix shift reflects higher priced US Privigen sales outstripping European sales. There are also signs of increased Privigen and Hizentra market share and increasing Albumin volumes into China.
For Macquarie, the upgrade to guidance from CSL is justification for the company's strategy, which is to first maximise throughput and increase market share in response to a major competitor's product recall, before turning attention to efficiencies and margins.
The increase to guidance also underscores CSL's strong market position in Macquarie's view, as the company has the market leading sub-Q Ig product, the highest share of the Chinese albumin market and structural cost advantages relative to peers.
Macquarie suggests a number of these drivers could support margins for some time yet, which implies further margin expansion into FY14 and FY15. Given CSL is currently guiding for flat long-term margins, this suggests upside risk to earnings forecasts in coming years remains.
To reflect the revised earnings guidance of management brokers across the market have lifted forecasts for CSL. Macquarie's net profit after tax estimates have risen 4.% this year and 5% in FY14, while UBS has increased its FY13 forecast by just over 6%.
Consensus earnings per share (EPS) estimates for CSL according to the FNArena database now stand at 242.8c for FY13 and 276c for FY14. The increases to earnings forecasts have driven price targets higher, the consensus target in the database moving to $51.71, up from $46.65 previously. There remains a wide range of targets, spreading from CIMB Securities at $45.33 to Macquarie at $55.00.
There also remains a spread in ratings, as the database shows CSL is rated as Buy four times, Hold three times and Sell once. BA Merrill Lynch has joined the Buy ratings, upgrading from Neutral given improved valuation in the stock thanks to the stronger than previously expected earnings and some expansion in price to earnings growth multiple for the stock.
Macquarie agrees CSL is a Buy, given the view yesterday's upgrade from management may signal the beginning of a period of margin expansion for the company. This reflects the potential for further margin benefits as the company maximises the benefits from recent market share gains by improving operating efficiencies.
Competitors are also supply constrained at present according to JP Morgan, which is a positive for both margins and market share. As well, share price support is expected from a $900 million share buyback that at present is only 10% complete.
Valuation is the driver of Credit Suisse's Neutral call (CSL shares hit an all-time high price yesterday), as while the broker suggests CSL should achieve above market growth for at least the next 12 months the stock is trading on a 12-month forward earnings multiple of just over 20 times. This is a 60% premium to the ASX20 Ex Financials, well above the five-year average premium of 39%.
Citi's (Sell) concern is that CSL's current momentum won't be sustained beyond FY13, especially as competitor Baxter is likely to be back operating at full strength in FY14. This means while double-digit earnings growth should still be generated it will be down from the 20% expected this year, making it difficult to justify the current share price.
Shares in CSL today are slightly higher in a weaker overall market and as at 11.45am the stock was up 3c at $50.04. This compares to a range over the past year of $29.61 to $50.55 and implies upside of around 3% relative to the consensus price target in FNArena's database.
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