CSL shares have gone nowhere for four years – Is there any value in the stock right now?

One of the market's most coveted growth darlings – CSL (ASX: CSL) – has slumped around 5% in the past month, at a time when major benchmarks like the ASX 200, S&P 500 and Dow Jones are scoring consecutive all-time highs.

This underperformance has left investors questioning the stock's longstanding reputation for defensive growth and reliable earnings. The stagnation stems from multiple challenges, including the complex US$14.6 billion Vifor acquisition completed in 2022 and lingering uncertainties about revolutionary weight loss drugs potentially transforming the healthcare sector.

CSL has largely traded sideways for the past four years – So is there any value in it right now? We'll try to unpack that question with the help of a few broker reports and data points.

Recent Earnings

Earnings are the most crucial catalysts for stock performance. A compelling earnings beat combined with robust forward guidance can drive a stock's valuation upward, potentially influencing its price trajectory not just on the announcement day, but for weeks or even months thereafter.

But CSL shares tumbled 4.5% on the day of its FY24 result on 13 August 2024. The key highlights from the results include:

• Revenue up 11% to $14.8 billion

• Net profit after tax up 20% to $2.64 billion

• Total full year dividend up 12% to US$2.64 cents per share

• FY25 NPATA guidance between $3.2-3.3 billion, up 10-13% year-on-year

While the FY24 result was largely in-line with analyst expectations, the FY25 guidance came in 5.5% below consensus due to slower Behring gross margin ramp up and foreign exchange headwinds of US$50 million. This was the main driver of the selloff.

Post-earnings, Citi analysts cut their FY25-26 NPATA forecasts by 3-4% on lower margins but lifted their target price to $345 (from $355) on lower CAPEX. The target price implies a 34x price-to-earnings (based on FY25 forecasts), and is higher than the pre-pandemic average of ~26.5x.

Vifor Headache

One of the most memorable comments about CSL's Vifor acquisition comes from Dushko Bajic, Head of Australian Equities Growth at First Sentier Investors.

“They expended US$12 billion for the acquisition and they’re only going to make an NPAT of around $400 million. That’s a 3.7% return on invested capital against CSL’s traditional 20%-plus return on invested capital," Bajic said at the Livewire Live event in Sydney on 17 September.

“It dragged the entire business down to a 10.5% return on invested capital and the stock has spent the last 18 months derating. From our calculations, it's probably cost $100 a share in its share price."

CSL reported a ROIC of 10.5% in FY24 compared to 12.2% in FY23, 18.1% in FY22 and 21.2% in FY21.

Trump Volatility

More recently, CSL shares have declined on concerns that the upcoming Trump administration may implement policies that could be negative for its vaccine business, which represents around 15% of the Group's earnings.

During Trump's first term, the number of influenza vaccine doses distributed in the US went from 155 million in 2017 to 175 million in 2019, representing an average annual growth of about 4%. The COVID-19 pandemic disrupted this trend in 2020, pushing vaccine distribution to an unusual peak of 194 million doses.

Now, in the aftermath of the pandemic, the US Center for Disease Control and Prevention (CDC) anticipates a pullback, projecting around 148 million doses to be distributed in 2024.

On a percentage basis, this represents a 23% decline from 2020 and 15% fall from 2019 levels.

Despite the pullback in vaccinations, Citi expects CSL to be "largely spared from potential legislation on pharma pricing given i) CSL's gross margin is lower than the pharma industry due to costs involved in plasma collection and fractionation, and ii) many of its products have no substitute or are life-saving."

"Whilst residual headline risks remain near-term, we see the pullback as a buying opportunity," the report said. The analysts retained a Buy rating and $345 target price, supported by earnings growth forecasts of 13% per annum over FY25-27.

The Challenge

Most analysts have been bullish on CSL for all the right reasons – consistent earnings growth, longer-term growth margin expansion opportunity, plasma collection and yield momentum, R&D pipeline and more. But the share price has never lived up to expectations over the past couple of years.

Take Citi's coverage for example:

Source: Citi

CSL's share price has remained stagnant over the past four years. But over the same period, the company has grown its earnings from $3.06 billion in FY20 to $3.98 billion in FY24, representing a solid 6.8% compound annual growth rate.

This leaves investors in a tricky spot – a fundamentally sound company with no share price momentum. The sound fundamentals may be the reason why the share price hasn't fallen any further and received plenty of support around the $235 level – a price point that has withstood significant market events, including the pandemic selloff and weaker-than-expected earnings in February 2021 and February 2022. The past performance of CSL shows us that value has emerged from buying into weakness rather than attempting to time a breakout.

CSL chart (Source: TradingView)