CSL - CSL Limited

[>Apocalypto<]

Re: CSL - why so quiet about this company?

I cant find a thread for CSL which surprised me given that this company has soared in the last few months. Maybe the Mods will find it for me.

This is one share that I decided to buy several months ago because while I thought it would be a good performer price wise, it is a company that provides state of the art medical research to the world (Gardasil, Bird Flu vaccine to name the 2 most obvious) and so has become my ethical share.

Todays announcement has seen it rise $2 today, yet barely a mention on the forum.

Why is that? Are biomedical shares simply not exciting enough? Gardasil will save so many lives, save $$$ in medical treatment in the prevention of cervical cancer, yet barely a whisper - please tell me it isnt because its about women? Or do they need to discover a cure for prostate cancer before it gets talked about

Your ethical share that is a great way of selecting!

 

[CanOz]

Another one to go short on next week. Looks like its closed well off the highs today. It is Friday though. Been a pretty hard run for it lately.

Cheers,

 

[Prospector]

Currently up $7.70 in 10 minutes. Any record?

 

[chops_a_must]

Currently up $7.70 in 10 minutes. Any record?

A rather large gap up. Lol! Big dividend increase, fantastic.

 

[michael_selway]

A rather large gap up. Lol! Big dividend increase, fantastic.

lets see what the new forecasts will be, below is before annoucement

Earnings and Dividends Forecast (cents per share)
2006 2007 2008 2009
EPS 184.2 249.0 301.8 367.3
DPS 68.0 86.6 103.7 126.6

EPS(c) PE Growth
Year Ending 30-06-07 249.0 28.2 35.2%
Year Ending 30-06-08 301.8 23.2 21.2%

thx

MS

 

[chops_a_must]

Is someone able to do a wave count on this? Because it looks pretty interesting on the 10 year chart.

 

[dhukka]

lets see what the new forecasts will be, below is before annoucement

Earnings and Dividends Forecast (cents per share)
2006 2007 2008 2009
EPS 184.2 249.0 301.8 367.3
DPS 68.0 86.6 103.7 126.6

EPS(c) PE Growth
Year Ending 30-06-07 249.0 28.2 35.2%
Year Ending 30-06-08 301.8 23.2 21.2%

thx

MS

Michael if you want to understand the value of CSL looking at earnings is only half the story. If you look past the headline result of a 46% increase in profits you''ll see that $53m (mainly exchange rate losses) was written off directly against equity. Taking these charges into consideration NPAT is up just 5.3% on pcp. Fair value of CSL is around $35 - $40. One of the most overpriced large cap stocks on the ASX IMHO.

 

[Knobby22]

Michael if you want to understand the value of CSL looking at earnings is only half the story. If you look past the headline result of a 46% increase in profits you''ll see that $53m (mainly exchange rate losses) was written off directly against equity. Taking these charges into consideration NPAT is up just 5.3% on pcp. Fair value of CSL is around $35 - $40. One of the most overpriced large cap stocks on the ASX IMHO.

Dhukka

This is an international company, the way I read it is that the foreign exchange rate losses represent the fall in foreign currencies and assets held in that currency against the $A. When the $A falls it will reverse.

This is an international biotech drug company with high barriers to entry, increasing profits, real growth dues to research and takeovers such as Zenyth (which has a possible asthma cure among others).
What about the $85 mil "lost" on research?

It is not an Aussie bank and should be looked at differently.

 

[dhukka]

Knobby,

Since CSL earns most of its money in foreign currencies the movements in exchange rates represent a normal part of business. However CSL reports results as if they those currency movements were abnormal. Whilst its instructive to show the effect of exchange rate movements on earnings if you are truly interested in valuing a company's shares then looking at the underlying growth in equity is more important than earnings. If you just look at earnings and ignore changes in s'holders equity your missing the big picture.

You're right this is not a bank but it should not be valued any differently. CSL is a well managed profitable business but at current prices anyone interested in seeking value should look elsewhere.

Dhukka
This is an international company, the way I read it is that the foreign exchange rate losses represent the fall in foreign currencies and assets held in that currency against the $A. When the $A falls it will reverse.

This is an international biotech drug company with high barriers to entry, increasing profits, real growth dues to research and takeovers such as Zenyth (which has a possible asthma cure among others).
What about the $85 mil "lost" on research?

It is not an Aussie bank and should be looked at differently.

 

[Knobby22]

Knobby,

Since CSL earns most of its money in foreign currencies the movements in exchange rates represent a normal part of business. However CSL reports results as if they those currency movements were abnormal. Whilst its instructive to show the effect of exchange rate movements on earnings if you are truly interested in valuing a company's shares then looking at the underlying growth in equity is more important than earnings. If you just look at earnings and ignore changes in s'holders equity your missing the big picture.

You're right this is not a bank but it should not be valued any differently. CSL is a well managed profitable business but at current prices anyone interested in seeking value should look elsewhere.

I see what you are saying dhukka, but wouldn't you say that as the money and assets stay in the country that it is made then it really doesn't matter.
It would obviously if say the company was importing into Australia but in a real sense they are separate business linked by R&D. I would be horrified if CSL started taking contracts to smooth out the currency fluctuations purely to keep asset prices the same.

Asset value is not to me an important factor unless the buying and selling of the assets i.e. land takes place. That is why in a bank it is more important but not overly so.
I know Benjamin Graham harped on it in his books but times have changed. The company is not a selection of assets to be sold but a business.

If you feel it is, then fair enough. Technical indicator investors often think that we fundamental investors see the same things and make the same judgements but the reality is we are as different as they are.

I have had a great run with this stock, buying at the float and at $15 and $20 when they dropped briefly (and have never sold) and the company is starting to get near my estimated value of $85 however I am hopeful to hear of some success on the new drug front and expect CSL to be worth $100 in a years time.

Knobby

 

[dhukka]

I see what you are saying dhukka, but wouldn't you say that as the money and assets stay in the country that it is made then it really doesn't matter.
It would obviously if say the company was importing into Australia but in a real sense they are separate business linked by R&D. I would be horrified if CSL started taking contracts to smooth out the currency fluctuations purely to keep asset prices the same.

Asset value is not to me an important factor unless the buying and selling of the assets i.e. land takes place. That is why in a bank it is more important but not overly so.
I know Benjamin Graham harped on it in his books but times have changed. The company is not a selection of assets to be sold but a business.

If you feel it is, then fair enough. Technical indicator investors often think that we fundamental investors see the same things and make the same judgements but the reality is we are as different as they are.

I have had a great run with this stock, buying at the float and at $15 and $20 when they dropped briefly (and have never sold) and the company is starting to get near my estimated value of $85 however I am hopeful to hear of some success on the new drug front and expect CSL to be worth $100 in a years time.

Knobby

Knobby CSL do use hedges against currency fluctuations. Currency movements are reported net of such hedges. I'm not sure what you're talking about with regard to valuing a company based on its asset values. I don't value banks that way or CSL. I value businesses and the value of a business is reflected by its equity value. That equity is then multiplied by a sustainable ROE to refect its future prospects and then discounted at an apporpriate discount rate to reflect an investors required return and the risk of the business. In doing so and using an ROE at the high end of CSL's historical range I cannot get more tha $35 - $40 a share for CSL.

I would be interested to see how you come up with $85 a share.

 

[Knobby22]

Dhukka

Here is my valuation, I warn you that you will probably hate the way I do it and its pretty rough.

Firstly you need to confirm earnings are represented in the cashflow statement and are not one off. Secondly you need to ensure debt levels will not be disabling. Finally you have to have confidence in management, Elizabeth Alexander and Brian McNamee are probably the most honest and reputable people in the Australian stockmarket so I have no problem there.

OK, how my latest estimate:-
I chose an interest rate of 8%. I have not accounted for the inflation rate but assume it remains stable.

I have assumed growth of 60% this year, 20% next year then 25% the year after.
EPS will be $4.41 in 2009.

I then assume that future growth is 20% per year and can sell the shares at a PE of 20.

20 x 4.41 = $88.20 reducing to todays price divide by 1.04 (year half over) * 1.08 *1.08

$72.89

Add dividends (0.88/1.08 + 1.04/1.167 +1.28/1,26) = $2.71

and you get a price of $75.60.

So I guess I have to partially agree with you, the shares are fully priced at the present time.

 

[ducati916]

Impressive discussion chap's, possibly I'll have to pop in a little more often.
I have nothing to add unfortunately as I'm not familiar with this stock.

jog on
d998

 

[chops_a_must]

So I guess I have to partially agree with you, the shares are fully priced at the present time.

And from an insider, there are no new products or discoveries to be released in the near future to keep the price moving up. Apart from perhaps the iscomatrix adjuvant.

So I'm expecting a bit of a retrace after it goes ex-dividend.

 

[dhukka]

Dhukka

Here is my valuation, I warn you that you will probably hate the way I do it and its pretty rough.

Firstly you need to confirm earnings are represented in the cashflow statement and are not one off. Secondly you need to ensure debt levels will not be disabling. Finally you have to have confidence in management, Elizabeth Alexander and Brian McNamee are probably the most honest and reputable people in the Australian stockmarket so I have no problem there.

OK, how my latest estimate:-
I chose an interest rate of 8%. I have not accounted for the inflation rate but assume it remains stable.

I have assumed growth of 60% this year, 20% next year then 25% the year after.
EPS will be $4.41 in 2009.

I then assume that future growth is 20% per year and can sell the shares at a PE of 20.

20 x 4.41 = $88.20 reducing to todays price divide by 1.04 (year half over) * 1.08 *1.08

$72.89

Add dividends (0.88/1.08 + 1.04/1.167 +1.28/1,26) = $2.71

and you get a price of $75.60.

So I guess I have to partially agree with you, the shares are fully priced at the present time.

Knobby,

Valuations by nature are subjective. I don't hate your valuation method but I'm not sure about the logic behind it. Essentially you are performing a 3 year DCF but using eps instead of free cashflow. By using eps you are not discounting free cashflow as eps is after depreciation, amortisation, interest and tax, but maybe that's your intention? You are assuming CSL can grow earnings at 20% indefinitely, thats fairly optimistic, its standard practice by analysts to use a 3 - 4% terminal growth rate in DCF calcs. Just for the record I'm not a fan of DCF valuations. However you are making the same mistake analysts make when using DCF's - double counting of cashflows. If you are going to add dividends to your valuation you need to deduct them from eps or else you are counting the cashflow twice, once as retained earnings and once as a distribution in the form of dividends. You can't have it both ways.

I then assume that future growth is 20% per year and can sell the shares at a PE of 20.

If you accept that the value of a business is independent of its price as quoted on the ASX, then how can you use price as an input in determining value? The price has nothing to do with the value of the business.

 

[Knobby22]

Dhukka

To me eps is the real crux of a company, so you are right, it is intended however you still need to look at cashflow, debt, market competitors, long term factors etc. as a seperate exercise.

I disagree that you should not count dividends as it is double counting as a valuation should reward the giving of dividends by a company as it is a gain you get in your hand rather than leaving it in managements hand. Maybe I should have put in a adjustment factor that depends on franking and reduces total value however in this case, dividends affect the valuation of CSL only marginally as they are so small.

Regarding the selling price at a PE of 20. Finally, I am not using price as an input value. I am assuming a level of growth and then providing a resonable price based on that growth. So price is an output, not an input.

Using 4% growth just bacause it is standard practice is silly, CSL is a high growth company. Assuming 20% growth and therfore a PE of 20 may be too low but I am being conservative. We all know the market doesn't price for indefinitely but for one or two years in advance.

Knobby

 

[ducati916]

knobby22

It would seem that you are using a variant of the GARP methodology.
If so, is that your general methodology, or due to the current bull market?

jog on
d998

 

[Knobby22]

knobby22

It would seem that you are using a variant of the GARP methodology.
If so, is that your general methodology, or due to the current bull market?

jog on
d998

Your right. it is very similar! I appear to be though I didn't know of it. My valuation methods are my own invention but of course nothing is original. Thanks for that, there is a lot of interesting information to read.

And the second point is valid also. The parameters change depending on economic outlook and the state of the market. (In other words there is a fudge factor)

Also, this methodology only works for industrials with a track record.

 

[ducati916]

Your right. it is very similar! I appear to be though I didn't know of it. My valuation methods are my own invention but of course nothing is original. Thanks for that, there is a lot of interesting information to read.

And the second point is valid also. The parameters change depending on economic outlook and the state of the market. (In other words there is a fudge factor)

Also, this methodology only works for industrials with a track record.

Interesting that you reached this methodology independantly.
I would say that *most* fundamental valuation models require some form of track record.

The *fudge factor*...........don't we all?

jog on
d998

 

[stoxclimber]

Dude, your perpetual growth forecast is bigger than your cost of capital..