Investors may be surprised to learn that in calendar year 2016, CSL Limited (ASX: CSL) has underperformed the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
CSL's share price has gained just 1.6% compared with a rise of 2.4% by the index.
Of course, over the longer term the returns from CSL have been exceptional. Over the past one and five years the stock has gained around 20% and 260% respectively.
Having reported underlying revenue and profit growth (on a constant currency basis) of 8% and 5% respectively for FY 2016, what expectations should investors have for the future?
R&D investment
CSL's management understands the importance of reinvesting revenues back into research and development (R&D). Thankfully, to date, R&D spend appears to have added value for shareholders.
In FY 2016, the R&D investment was US$614 million which equated to around 10% of revenues.
A continuing large R&D spend positions CSL to continue developing breakthrough treatments and growth in the future.
Market leader with competitive advantages
CSL operates businesses which are not easy to replicate thanks to its bank of expensive intellectual property which has been developed over decades.
Through both organic and acquisitive growth, CSL has achieved scale in areas including influenza vaccine and plasma therapies. These market leading positions are hard to topple.
Investors can reasonably expect CSL's competitive advantage to be enduring.
Balance Sheet Strength
CSL's business generates plenty of cash and allows the group to operate with a strong balance sheet.
Apart from the defensive benefit of harbouring a rock solid balance sheet, CSL's cash flows have supported successive share buy backs which have enhanced earnings per share.
Buybacks are likely to feature in the group's future capital management plans.
Outlook
CEO Mr Perreault has stated that:
- "CSL is a growing, broad-based, stable business which generates solid earnings growth"
- "CSL Group's NPAT is expected to grow approximately 11%, at constant currency, on the FY16 result after adjusting for the one-off gains and costs associated with the acquisition of the Novartis influenza vaccines business. On the same basis, EBITDA is expected to grow approximately 14% this financial year. EPS are again expected to exceed profit growth."
Fair Price
Based on one analyst consensus, CSL is trading on a forward price-to-earnings multiple of approximately 29 times. (source: Reuters)
That's certainly not "cheap" by conventional standards, but considering the defensive strength and long term growth potential of the company it's arguably a fair price to pay for investors.
