Materials bounce with tariff news, when will CSL find support (CSL)
WHAT MATTERED TODAY
The market clawed back yesterday’s losses as Mr Trump surprised the market with a softer than expected first Tariff blow on China. Traders feared the worst heading into the announcement with the gloomiest predictions at 25% on $US 200b of Chinese goods, but Trump imposed a 10% tariff as a start, delaying the 25% out to 2019 if China fails to negotiate over the issue. As a result there was buying of the emerging markets, base metals and resources were strong helping materials catch a bid as markets took on some risk.
Telcos were dragged lower by TPG on fear mongering around the market of the possibility the TPG-Vodafone merger falls over, while CSL continued to weigh on healthcare – we speak about this market darling later in the piece.
Westpac was the best bank today as their lending rate hike came into force. This was coupled with a drop in marketed rates for new borrowers in an effort attract new customers – something the banks find notoriously hard to do. The market enjoyed the news, and any headway into gaining extra market share will serve them well. The market is only looking for small, incremental growth numbers from the big four – which should be achievable i.e. expectations remain low.
Overall, the index closed up +28 points or 0.46% today to 6190. Dow Futures are currently trading up 41pts/0.16%.
ASX 200 Chart
ASX 200 Chart
CATCHING OUR EYE
Broker Moves; Macquarie took a knife to aged care stocks today, an early mover ahead of the pending Royal Commission and subsequent regulations. The three names resumed their selling after seeing some relief yesterday – in our view it was a good opportunity to let stock go with a small bounce and some solid volume. Today Estia (EHE) –3.64%, Japara (JHC) –6.69% & Regis (REG) –1.63%.
Japara Healthcare (JHC) Chart
RATINGS CHANGES:
· Kathmandu Downgraded to Hold at Canaccord
· Estia Health Downgraded to Neutral at Macquarie; PT A$2.70
· Japara Downgraded to Underperform at Macquarie; PT A$1.33
CSL $202.49 / -1.36%; Plasma company CSL has been soft in September coming under pressure amid some profit taking in the recently strong growth area of the market. CSL is now down 13% from its all-time high in early September, including a touch over 1% today – although this is still above where the stock was trading at the beginning of August and doesn’t take into account the $1.27 dividend paid last week.
The question remains, why has the biotech stock come back so aggressively in a market that has been relatively stable? CSL currently trades on a PE of 33.1x, which isn’t all that stretched for healthcare or growth stocks if we look globally. It reached a high of 37.4x not long ago, but it is still ~30% above its historical average of 25x. The stock rerated over the past couple of years as it has been achieving huge growth, justifying a higher PE. Over FY18, earnings grew ~30% - a juicy number and companies with that kind of growth would generally trade closer to 40x than 20x earnings.
So what price do you pay for CSL? Looking forward, earnings are now forecasted to grow at around 14% for FY19, steadily easing over the outer years to around 11.5% in FY22 – according to Bloomberg consensus. These are still great numbers, no doubt about it however low double digit growth and a proven track record of meeting expectations will mean investors are happy to pay a higher multiple. But these numbers are less than half the growth the company was achieving when the market was paying 37x. With circa 12% growth over the foreseeable future, CSL certainly deserves to trade on a solid multiple, but 37x is too high in our view. On 25x forward earnings, which is its 5 year average, CSL is worth $156. A P/E of 30 equates to $180 a share.
CSL Chart
OUR CALLS
We removed the BENPG from the Income Portfolio today ahead of the NB Global Corporate Income Trust which lists on 26th September.
Have a great night
James / Harry & the Market Matters Team
Disclosure
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