With all the recent volatility in global markets, it’s easy to forget that we still have the bulk of earnings season ahead of us in Australia. August 13 is a notable date in the calendar as CSL, the ASX200’s third biggest company, updates investors on how things are going.

How does CSL make money?

CSL (ASX: CSL) is one of three Tier 1 plasma therapy companies. All three of the big players – CSL, Grifols and Takeda – are vertically integrated. This is because sourcing plasma, which is derived from human blood, is a key constraint in production. CSL is well positioned here as it owns over 30% of the world’s plasma collection centres.

CSL Behring largely focuses on plasma-derived treatments for rare diseases, while CSL Seqirus is the world’s second biggest flu vaccine franchise.

CSL’s competitive advantage

Like its other Tier 1 plasma peers, CSL benefits from economies of scale that minimise the cost per litre to collect and process plasma. Processes such as purifying and testing are more efficient with higher volumes, as labour and overhead costs are leveraged.

The big three’s vertical integration also reduces their need to buy plasma on the open market at higher prices. This is reflected in higher gross margins for the tier 1 trio, which consistently average around 20 percentage points higher than tier two players like Octopharma.

This cost advantage – as well as some intangible assets from CSL’s strong R&D operations – underpin Morningstar’s Narrow Moat rating for the firm.

What will markets want to see from CSL’s earnings?

Morningstar’s CSL analyst Shane Ponraj thinks investors will be looking at three key trends in the company’s next earnings update.

Higher Behring margins: Covid-19 restrictions made it harder and more expensive to source plasma. This squeezed profit margins at Behring, and a recovery towards pre-pandemic levels will play a big role in CSL meeting its forward guidance. CSL set a timeline of three to five years for this to take place. Falling plasma collection costs and price increases led to progress in H1, but investors will want more.

Hemgenix rollout: Ponraj says investors will also be keen to hear more about Hemgenix, a gene therapy that CSL licensed from uniQure in fiscal 2020 and gained FDA approval in 2022. Ponraj views gene therapies, which seek to cure rather than treat diseases, as the plasma industry’s biggest potential long-term risk. Strong sales for Hemgenix could soothe investor concerns as it would show that CSL can effectively compete in this growing area.

Vifor sales: Results from CSL’s Vifor segment – which focuses on kidney treatments – were a dampener on CSL’s last investor update. Vifor’s boss pointed to headwinds in the key US market, where health insurers have increasingly encouraged the use of cheaper alternative treatments where possible. Any improvement here would be seen as a positive.

The long-term view

Immunoglobulin product sales remain key for CSL, and Ponraj thinks the long-term demand picture looks fairly strong. Consumption per capita in the US, Canada, and Australia is 2 to 3 times greater than CSL’s other markets, highlighting unmet needs elsewhere. He forecasts average yearly growth in CSL’s sales of these products of 11% over the next five years.

Recombinant drugs, which are genetically modified as opposed to being derived purely from plasma, and gene therapies could disrupt some of CSL’s end markets. This has already taken place in the treatment of haemophilia, where Roche’s recombinant Hemlibra has taken significant share.

Ponraj expects the impact of new treatments to be less severe in other areas of CSL’s business. Very high prices and further regulatory hurdles (let alone unproven efficacy in some cases) suggest that the launch and adoption of gene therapies could take some time. CSL has also invested heavily in its own capabilities here, including the licensing of Hemgenix from uniQure and the acquisition of Calimmune.

Overall, Ponraj thinks that CSL can grow its revenue at an average of 9% for the next five years while growing profits at a higher 13% annual clip. This disparity stems from Ponraj’s expectation that Behring margins can recover to pre-Covid levels and that CSL can wring further efficiencies from its plasma collection and processing operations.

Where is CSL’s valuation sitting before earnings?

CSL currently trades at around $305 per share for a total market value of around $150 billion. Going into earnings, this is roughly in line with Ponraj’s Fair Value estimate of $310 per share. CSL shares currently have a three-star Morningstar rating.

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Terms used in this article

Star Rating: Our one- to five-star ratings are guideposts to a broad audience and individuals must consider their own specific investment goals, risk tolerance, and several other factors. A five-star rating means our analysts think the current market price likely represents an excessively pessimistic outlook and that beyond fair risk-adjusted returns are likely over a long timeframe. A one-star rating means our analysts think the market is pricing in an excessively optimistic outlook, limiting upside potential and leaving the investor exposed to capital loss.

Fair Value: Morningstar’s Fair Value estimate results from a detailed projection of a company's future cash flows, resulting from our analysts' independent primary research. Price To Fair Value measures the current market price against estimated Fair Value. If a company’s stock trades at $100 and our analysts believe it is worth $200, the price to fair value ratio would be 0.5. A Price to Fair Value over 1 suggests the share is overvalued.

Moat Rating: An economic moat is a structural feature that allows a firm to sustain excess profits over a long period. Companies with a narrow moat are those we believe are more likely than not to sustain excess returns for at least a decade. For wide-moat companies, we have high confidence that excess returns will persist for 10 years and are likely to persist at least 20 years. To learn about finding different sources of moat, read this article by Mark LaMonica.

Uncertainty Rating: Morningstar’s Uncertainty Rating is designed to capture the range of potential outcomes for a company. An investor can think of this as the underlying risk of the business. For higher risk businesses with wider ranges of potential outcomes an investor should consider a larger margin of safety or difference between the estimate of what a share is worth and how much an investor pays. This rating is used to assign the margin of safety required before investing, which in turn explicitly drives our stock star rating system. The Uncertainty Rating is aimed at identifying the confidence we should have in assigning a fair value estimate for a stock. Read more about business risk and margin of safety here.