It's A Bloody Overreaction

Sun Herald

Sunday November 9, 2008

David Potts

CSL's share price deserves to be in healthier shape, writes David Potts.

UNTIL there's blood on the streets the bear market isn't going to give up.

At least CSL, which produces plasma, is covered in blood so maybe that'll help. Certainly health care stocks have been seen by the market to be relatively safe, though relatively is the operative word.

Even CSL's share price, after allowing for the recent one-for-three split, has been marked down hard, apparently due to a slowdown in demand for the world's only cervical cancer vaccine, Gardasil.

That's the trouble with vaccines; once inoculated, that's it.

No repeat business there.

The shares have been savaged because Gardasil inoculations are tapering in Australia and the US, though picking up in Europe.

But talk about overreaction.

Three-quarters of CSL's business is blood plasma, most of it offshore, where it has a dominant market share.

Gardasil was always a bonus and concentrated over a short period in the scheme of things. It's true blood-plasma prices were depressed for a while but that's no longer the case. Besides, CSL has been producing rip-roaring profits despite what had been a soaring dollar.

Imagine what a profit machine it must be when the currency is going its way, as it has been in the past few months.

The key currencies are the US dollar, euro and Swiss franc.

A 1 percentage point change in the basket of these adds $7.9 million to CSL's profit. Last year's results were based on an exchange rate of 89.5 US cents.

That's right - CSL is one of the few companies that's issued a profit upgrade, of 15 per cent to 20 per cent, no less in the middle of the credit crisis.

Speaking of which, it had no trouble raising $1.75 billion to buy the US-based pharmaceutical group Talecris - a $3.5 billion takeover that has been hailed by analysts but still needs the green light from the US Federal Trade Commission, which isn't expected to be a problem, although you never know. The acquisition will let it squeeze even more out of blood, which should please the sharemarket.

And CSL's track record in absorbing acquisitions is as superb as it is, well, clinical.

Meanwhile, CSL has what might be another Garadasil in its human papilloma virus (HPV) vaccine.

ADVANTAGES

Falling dollar

Safe haven

Track record

Low debt

DISADVANTAGES

Dollar volatility

Gardasil slowing

Expensive

Low dividend

VERDICT

Well-regarded by analysts with eight buy and three hold recommendations.

Top estimate is $40 a share.

© 2008 Sun Herald

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