The market has traditionally been characterized by very limited price competition and discipline with respect to capacity. In many ways, the plasma collection industry operates in a similar manner to the mining industry where participants need to be disciplined and with respect to overcapacity i.e. too much plasma collection leads to lower prices and conversely, too little plasma collection means high prices can be attained at the expense of lower revenue. As the market share leader, CSL tends to be the volume control in the market and, if recent results are suggestive, has been doing a very good job.
CSL recently delivered results that showed revenue growth was up an impressive 13% year-over-year, not bad for a fairly mature business. Even more notable was that profit was up an impressive 35% year on year. CSL is also a very financially disciplined business that has significant pricing power.
Because derivative products from plasma are used to treat hemophiliacs and provide vitally needed albumin, if capacity is maintained, then pricing power results, leading to strong margins and sustained rates of return on both invested capital and equity.
CSL has maintained operating margins of greater than 20% in the last few years, which spiked up beyond 30% in the company's most recent earnings. CSL's returns on invested capital just show how much financial discipline management have. Returns on invested capital have generally been in excess of 20% for most of the last decade or more.
The outlook for CSL is positive. Plasma collection remains tight and the industry disciplined with respect to capacity. That likely means that revenue growth should continue to be buoyant and margins remain healthy. CSL demonstrated progress of its entry into niche speciality drugs with smaller populations but much higher margins than its core plasma business. Specialty products sales rose some 20% in CSL's most recent results.
An unexpected bonus for CSL may turn out to be its underperforming flu business, Seqirus. While Seqirus has been loss making for the past few year, there are signs that CSL management have been making progress to turn around this business. That may provide longer-term upside for CSL investors. Additionally CSL has a number of later stage drugs in the pipeline. Most notably, CSL 112 is a potential blockbuster cholesterol killer, which has the potential to 'suck up' bad cholesterol and reduce the incidence of repeat heart attacks.
CSL has had a strong run in recent times. Its share price is up more than 40% over the last 1 year, and more than 16% since the start of the year. The stock currently trades at a forward PE of almost 35x earnings. While the price is currently a little too rich for my liking, this is a high-quality business that would make a high quality defensive growth holding for any investor.