CSL Gaining At Baxter’s Expense

Last week Baxter of the US reported a 5% revenue decline for its Bioscience division, within which plasma products recorded growth of 3% compared to the previous corresponding period. The company indicated the overall result showed some market share losses in the Antibody Therapy (IVIG) market in the US, lower albumin sales in that market and delays or lost tenders related to Recombinants (pdFVIII).

In the view of Citi, the winner from Baxter’s update is Australian blood products group CSL (CSL), as the company appears to be gaining market share at the expense of Baxter given CSL’s liquid IVIG product is the cheapest in the market by some margin.

As well, Citi suggests CSL is also gaining share in the albumin market in the US as while Baxter’s numbers in this market were weaker industry feedback suggests volume growth has been strong of late. Citi also points out the fact Baxter is reporting stronger IVIG growth in markets such as Europe is a positive for CSL as the broker expects this will offset pricing pressures.

JP Morgan also saw encouraging signs for CSL from the Baxter update, suggesting the fact the US company now expects Antibody Therapy sales to be down 10% against earlier indications of a 10-15% drop are an indication the market in the US is stabilising.

But BA Merrill Lynch is not so sure, taking the view while the Baxter commentary was a positive it remains too early to call an inflection points for the plasma industry as a whole. Given the plasma market remains sensitive to macroeconomic data the broker doesn’t expect any clear timing of a recovery to emerge in the near-term.

From a company specific view however, BA-ML agrees CSL appears to be taking some market share from Baxter, particularly in key market areas. This should mean a strong FY10 result, though some of this advantage should then be competed away in the broker’s view as Baxter pushes ahead with new products.

The issue for BA-ML is while a recovery in the plasma market remains likely, there is still evidence of continued price weakness. This could delay any global value recovery in the sector, and for this reason the broker remains Neutral on CSL.

Even allowing for this, JP Morgan suggests there is value in CSL, as its estimates already factor in flat pricing and volume growth of 5% in FY11-12 and longer-term pricing growth of 2-3% in IVIG along with 5% volume growth.

Using such estimates JP Morgan expects CSL can deliver a three year earnings per share (EPS) capitalised annual growth rate of around 11%. With the stock trading on a one-year forward earnings multiple of around 16 times at present this suggests value in the broker’s view.

Citi has matched JP Morgan’s Overweight rating with a Buy recommendation of its own, this while factoring in little in the way of earnings growth in FY11. Citi suggests it may take 12 months, but the stock is attractive on such a timeframe given the likelihood of a strong rebound in the industry in the mid or late part of next year.

As well, Citi points out CSL still has a very strong balance sheet that can be used to take advantage of any merger and acquisition opportunities that may present themselves, while there is still blue sky from possibilities such as albumin or IVIG being successful as a treatment for Alzheimer’s Disease.

Any success in this could be significant, JP Morgan estimating just 5% penetration in the Alzheimer’s market for IVIG could increase IVIG demand in the US by a multiple of around five times. The broker suggests this could mean significant price increases given current capacity in the US IVIG market.

In terms of the earnings outlook for CSL, Citi is forecasting earnings per share (EPS) of 193.6c this year, 204.6c in FY11 and 237.6c in FY12, while JP Morgan is forecasting EPS of 195.4c, 197.8c and 226.1c respectively. BA-ML is at 193c, 196c and 231c respectively for FY10-FY12. This indicates expectations are for EPS growth to take on a much stronger pace from FY12 onwards. Consensus EPS estimates according to the FNArena database stand at 190.6c this year and 198.3c in FY11.

Overall, the database shows CSL is rated as Buy and Hold five times each, with an average price target of $37.93. Shares in CSL today are stronger and as at 11.55pm the stock was up 35c at $32.75. Over the past year the stock has traded in a range of $29.28 to $37.56, the average price target in the FNArena database implying upside of around 15% from current levels.

Greg Peel

About Greg Peel

Greg Peel joined Macquarie Bank in 1986 and acquired trading experience in equities, currency, fixed income and commodities derivatives, ultimately being appointed director of equity derivatives trading. He later published In With The Smart Money (a plain English guide to the mysterious world of financial markets and derivatives) and acted as a consultant to boutique investment funds. In 2004 Greg joined FNArena as a contributing writer. He is now a director and principal of the company. Greg compliments the journalistic background of the FNArena team with lengthy experience as a financial markets proprietary trader.

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