The FNArena database shows a 6:4 split in terms of Buy and Hold ratings for blood products group CSL (CSL), most of the positive views based on expectations of strong earnings growth in coming years.
But in the view of Morgan Stanley earnings growth forecasts in the market for CSL are too high, meaning there is a risk of negative earnings revisions beyond this year. As well, Morgan Stanley suggests a lower growth outlook relative to its history should deliver a de-rating with respect to the stock’s earnings multiple.
According to Morgan Stanley’s numbers, CSL has a five-year average earnings multiple of around 21.5 times 1-year forward earnings, yet the stock is currently trading on a multiple of around 18.1 times. This implies upside potential of around 19%.
The problem with this argument in Morgan Stanley’s view is earnings risk is to the downside. To highlight this the broker notes if CSL reports net profit of around $1,050 million for FY10, which is in line with current guidance, around $125 million will be derived from H1N1 vaccine sales and around $90 million from HPV royalties.
This suggests base earnings for FY10 are closer to $835 million, as the H1N1 royalty is a non-recurring item and HPV royalties are continuing to decline. Allowing for 10% earnings growth in FY11 and assuming HPV royalties next year of around $90 million, this implies FY11 earnings of around $1,008 million. This compares to a current consensus net profit forecast of around $1,150 million.
To account for this Morgan Stanley has set its price target for the stock at $33.12, which implies an earnings multiple of of 17.8 times in FY11. To the broker this means the current share price multiple of around 18.1 times is appropriate given the company appears to be entering a lower growth phase. This supports an Equal-weight rating within an In-Line industry view.
One risk to its view, according to Morgan Stanley, is further good news with respect to the use of IVIG in treating Alzheimer’s Disease, where early results have been encouraging. Citi agrees, seeing this potential as a major reason behind its Buy rating given additional revenue from success in this area could run into the billions.
As well, while Citi accepts underlying earnings growth in FY11 will be modest, it sees the risk in later years as being to the upside. Credit Suisse is similarly positive on the longer-term outlook, estimating an earnings boost from IVIG being used to treat Alzheimer’s could generate a valuation boost for CSL of anything from 7-44%.
This potential remains some time off, Credit Suisse noting trials of IVIG for Alzheimer’s won’t be completed until 2013 and UBS adding it would likely be 2015 before FDA approval in the US was granted.
UBS suggests this is not in the share price, as evidenced by its price target for CSL of $41.00. Credit Suisse has a target of $40.50, while the average price target according to the FNArena database stands at $38.56.
Shares in CSL today are weaker and as at 12.30pm the stock was down 9c at $36.96. This compares to a range over the past year of $28.43 to $37.56 and implies almost 5% upside to the current average price target according to the database.