CSL Limited (ASX: CSL) is a protein science company, according to the company's current managing director Paul Perreault, but it is best known for its core business: collecting, fractionating and distributing human blood. CSL is one of Australia's most successful international companies, comparable with mining giant BHP Billiton Limited (ASX: BHP) in the sense that it truly is a world leader.
The company has been a particularly lucrative investment in the last decade or so. At the beginning of FY 2004, the share price was under $4.20, but today it sits at almost $68. That's an increase of over 1,600% in 10 years, without including dividends. One of the main reasons for this is that the company was able to continually increase its return on investment (ROI), as the chart below shows. If you know of a company that is likely to grow ROI like this over the next decade, please let me know!
In 2013 return on investments was over 40%. By way of comparison, BHP's ROI was over 46% in 2007, but had fallen to 16.7% by 2013. Although I don't think CSL will be able to grow its ROI much more, I'm fairly confident ROI will remain well above 25% for the foreseeable future. If not every year, then certainly on average.
As CSL grows, so does its competitive advantage, because size allows the company to manage expenses better than its competitors. Pricing for CSL's products can vary from market to market, but whereas competitors sometimes shift product to the market offering the best margins, CSL can produce ample volumes to supply demand in all markets. This allows the company to build a reputation for reliability, and take advantage of all opportunities to profit, not just the best ones. As an aside, CSL is making the world a better place by supplying all markets at all times; the availability of blood products is important to healthcare systems.
In a recent conference call, the current MD explained why the company has adequate supply: "We're scaled, we have capacity and we've been growing all along," he said. The graph below depicts operating cashflow per share and capital spending per share. It demonstrates that the company has continued to invest in production capacity as cashflow has increased, and suggests that the significant capex in 2007 facilitated the subsequent cashflow growth. It's worth noting that CSL issued new shares in 2009, but has bought back many more in the years since.
Foolish takeaway
CSL's performance is, in no small part, due to the stewardship of recently departed managing director Brian McNamee. Yet it is also significant that CSL originally stood for Commonwealth Serum Laboratories, and prior to 1991, it was a statutory authority. As a public company CSL was founded on the legacy of outstanding Australian scientists: the company has expanded since then, but it continues to perform essential services for society. CSL's blood collection centres, manufacturing plants, distributors and technical know-how will continue to generate cash for shareholders for decades to come. CSL shares may be expensive, but the business is one of the best.
