CSL is the goliath in the room for the healthcare sector, and even after its more than 25% correction, the $120bn company is still the third largest on the ASX. This healthcare goliath has been a huge market favourite over the years, but it’s struggled since delivering a disappointing and messy result back in February, leaving investors struggling to see the future pathway for growth. However, in a market scrambling to find quality value in a rich market, CSL now jumps out, plus it carries a degree of defensiveness, which we aren’t averse to as the market trades around its all-time high.
CSL has been under pressure on several fronts. CSL’s vaccine division, Seqirus, reported a 9% year-on-year revenue decline in the first half of FY25 while their US$11.7 billion acquisition of Vifor Pharma has not yielded the results they expected. The costs associated with this have materially reduced CSL’s return on invested capital and thrown some doubt on the strategic logic and execution of the important acquisition.
While CSL’s share price has basically been flat for the past four years, and is down 18% over the past 12 months, they are still growing earnings, just not at the rate the market had become accustomed. That growth has driven down CSL’s valuation down to a meaningful discount.
With the stock screening cheap, we believe investors are factoring in plenty of bad news, including threats of tariffs on US pharma sales, Behring’s gross margin recovery being lower or slower than forecast, and rising competition from new entrants, and if any of these factors are not as significant as expected, a re-rate higher could come quickly.
- We like the risk/reward towards CSL with it trading on an Est PE of 22, around 10 PE points “cheap” relative to its history, not many of those in today’s market environment.
