Narrow-moat CSL (CSL) reiterated fiscal 2025 guidance for constant-currency group net profit after tax before amortization, or NPATA, of USD 3.2 billion to­ USD 3.3 billion, implying ­10-13% growth on fiscal 2024 and a weaker second half consistent with typical seasonality aligned with the Northern hemisphere winter.

The guidance factors in continued gross margin recovery in CSL Behring and constant-currency group revenue growth of 5% to 7%, largely driven by immunoglobulins, or Ig. We keep our fiscal 2025 estimates broadly unchanged. But from fiscal 2026 onward, we decrease our group earnings estimates by 2% on average due to challenging conditions in CSL’s flu vaccine business, Seqirus.

However, the negative valuation impact was more than offset by a stronger US dollar and the time value of money, and we increase our fair value estimate by 5% to AUD 325 per share. CSL Seqirus is the group’s least material division and contributes 11% on average to our group gross profit forecasts, relative to CSL Vifor contributing 14% and CSL Behring contributing 74%.

csl-segment-profits


Figure 1: CSL gross profits by segment (forecast). Source: Morningstar

Shares look undervalued

Shares are undervalued and trade at a 20% discount to our fair value as we forecast a five-year Ig revenue compound annual growth rate of 10% and expect CSL Behring’s gross margin to better its prepandemic level of 57% by fiscal 2028, broadly consistent with management’s expectation. We remain optimistic about the long-term demand for Ig, driven by improving diagnosis rates for existing and new indications.

csl-price-versus-fair-value

Figure 2: CSL price versus Fair Value estimate. Source: Morningstar

First-half fiscal 2025 group revenue of USD 8.5 billion and NPATA of USD 2.1 billion were both up 5% in constant-currency terms and broadly tracking our full-year forecasts. The solid performance was driven by Ig revenue growth of 15% to USD 3.2 billion and CSL Behring’s gross margin expanding 170 basis points to 51%.

behring-margins

Figure 3: CSL Behring segment gross margins. Source: Company reports

Demand for CSL’s plasma products persists as supply improves

CSL is one of three Tier 1 plasma therapy companies that benefit from an oligopoly in a highly consolidated market. All the players are vertically integrated as plasma sourcing is a key constraint in production. The plasma sourcing market is currently in short supply, however, CSL is well positioned having invested significantly in plasma collection centers, owning roughly 30% of collection centers globally.

One major threat to plasma products is recombinant products. Recombinants are quickly replacing plasma products in haemophilia treatment despite being more expensive. CSL has an excellent R&D track record and has developed recombinant products for haemophilia. However, we expect revenue growth to slow in the haemophilia segment based on competitor Roche’s successful launch of recombinant Hemlibra.

Immunoglobulin product sales are key to CSL. The use of immunoglobulins is currently growing due to improved diagnosis, rising affordability, and gaining approval for increased indications. This market is not yet impacted by recombinants although both CSL and competitors are pursuing R&D in Fc receptor-targeting therapy to treat autoimmune diseases.

However, gene therapy represents the biggest risk to the plasma industry as it aims to cure rather than treat diseases. While the potentially prohibitive cost may result in slow adoption, CSL has strategically expanded its scope via the acquisition of Calimmune in fiscal 2018 and licensing a late stage Haemophilia B gene therapy, Hemgenix, from UniQure in fiscal 2020.

CSL is the second largest influenza vaccine manufacturer, behind Sanofi, and is on the forefront of changes in influenza vaccines where manufacturing is shifting from egg-based to cell-based culturing. It’s also conducting preclinical testing of mRNA influenza vaccines.

The company has demonstrated good sense for R&D and evaluates spend based on the commercial outlook. The strategy for CSL Behring has been to target rare diseases, a typically low volume and high price and margin business. There is little reimbursement risk in this area or in the vaccine business, Seqirus.

CSL bulls say

  • CSL is investing in both physical capacity and R&D, leaving it well positioned to take advantage of growth opportunities in the key immunoglobulins market.

  • The acquisition of Calimmune’s gene therapy platform in fiscal 2018 and UniQure's late stage haemophilia B gene therapy candidate in fiscal 2020 will help defend against emerging competition.

  • CSL has a strong R&D track record and the ongoing rate of investment is ahead of major competitors.

CSL bears say

  • Areas of the plasma industry could be replaced by newer therapies, which would leave CSL overinvested in plasma collection and fractionation capacity that will be hard to repurpose.

  • Key segments of haemophilia and hereditary angioedema are currently facing competitive pressure from Roche’s Hemlibra and Takeda’s Takhzyro that offer more convenient delivery.

  • The R&D pipeline has a highly variable range of outcomes and R&D spending could ultimately amount to nothing.

CSL (CSL)

  • Moat rating: Narrow
  • Fair Value estimate: $325 per share
  • Share price February 11: $257.60
  • Star 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 more about how to identify companies with an economic moat, read this article by Mark LaMonica.