Great lessons from CSL’s quarter century

APAC-News-CSL-25-Years-Rudi-Filapek-Vandyck

A small Australian government laboratory founded in 1916 is now the world’s single largest collector of blood plasma

A case study in performance: 25 years from government science laboratory to major market player  

31 October 2019 | Rudi Filapek-Vandyck (FNArena)

October marks the 25th anniversary of CSL (formerly known as the Commonwealth Serum Laboratories) as a listed company on the ASX. In fitting fashion, shares in Australia’s highest quality global success story surged to an all-time high of $253.

Looking back, corrected for share splits, the initial opportunity to add some CSL shares to anyone’s portfolio translates to circa 76.7c per share on the first day of public trading. In other words, regardless of what the immediate future holds, the investment return from owning CSL shares over the period has been nothing short of ginormous.

This realisation becomes even more so when one considers the share price graph over the period shows what looks like a steady, gradually rising uptrend unlike, say, Fortescue Metals which also reached a new all-time high in 2019.

That steady, almost unnatural looking performance has made CSL today’s third largest component of Australia’s leading share market index, the ASX200. Now also consider the fact that Commonwealth Bank shares peaked in May 2015, along with the other banks, and that BHP Group shares in 2014 were trading above $40, and one can only conclude CSL’s performance has been even more impressive.

If it hadn’t been for index heavyweights such as CSL, Macquarie Group, Transurban and Goodman Group it would have been near impossible for the ASX200 to reach for a new all-time high in 2019. Yet, the sad fact remains most investors don’t own shares in CSL, though some may have owned shares at some point throughout those 25 years.

The usual explanations heard are “too expensive” and “cannot get my head around it”. This goes both for the self-managing retail crowd as for professional fund managers. The logical observation to make here is that everybody who bought shares in the company, no matter when or at what price, is today sitting on a profit.

This story is not aiming to convert the masses. With the shares trading on FX adjusted, forward looking estimate of circa 37x FY20 earnings per share, it will nearly always be too “expensive” for typical value-seekers, while the implied 1.2% dividend yield is too low for the income hungry.

Maybe, without owning shares in the company, there are some valuable lessons to be learned from CSL for investors of all kinds and various levels of experience?

So what important lessons can investors draw from 25 years of CSL on the ASX?

It is much easier to create shareholder value when industry dynamics are supportive. This is why cyclical companies can have “quality”, but they cannot have consistency and/or reliability.

A good business is not the one that milks its current opportunity to the max. True quality shines through via the ability to add new avenues for growth. CSL today is not simply the ex-government organisation from the early nineties 25 years older.

A good company steadfastly invests in its business. This keeps it more resilient and in better shape when adversity hits. Or to put this in a better way: companies that do not invest in their business are essentially operating by the grace that nothing ever happens to their position or industry. This is arguably why many Australian companies are finding it so hard to grow these days.

A high-quality performer such as CSL will never trade at a cheap valuation but this doesn’t by definition prevent it from creating plenty of shareholder value. Good things befall good companies. Investors would be wise if they distinguished rapidly growing micro-cap fly-by-nights from long-term, structural growth companies that (deservedly) trade on premium market valuations. ResMed (RMD), REA Group (REA), and Seek (SEK), to name but a few, share equal characteristics.

Identifying a good investment does not equal a low Price-Earnings (PE) ratio, or a high yield, and certainly not backward looking or in isolation. It’s all about understanding what makes a company tick, and whether it can be sustained. This is the true Warren Buffett way, which is also why I believe Berkshire Hathaway would be a major shareholder in CSL if Warren Buffet had been born in Australia.

Don’t automatically assume there is no potential left once your initial investment doubled, or tripled, or quadrupled. Admittedly, CSL is among the exceptions and its example cannot be used as a guide for most of its peers on the ASX, which is why we all have to admire those shareholders today who stuck by the company even during times when momentum was favouring others. Probably the most heard regrets among long term CSL shareholders today are “I wish I never sold part of my shares” and “I wish I had bought more”.

The human mind is extremely good at fooling us. Over the years, I have heard so many investors telling stories about how they narrowly missed out when the share price fell towards $90, or they sold when the share price doubled from $39, or when it reached $150.

Harry Hindsight will tell each of you you could’ve bought back in, or additional shares, the next day, the next week, at the next pull back or during a general share market correction. You would still have profited handsomely.

It is never is too late to sell out of a bad investment (irrespective what your instinct tells you) and it never is too late to jump on board an excellent investment. Too many investors focus on what could possibly go wrong in the short term, and subsequently miss out on the positives long term. CSL is probably the best example of this. One strategy to circumvent this imaginary barrier is by waiting for the next share price or general market correction. When exactly is the best moment to buy? Well, how long exactly is a piece of string? 

It’s always difficult to predict the future, but assuming the above cocktail of internal and external forces remains in favour, in aggregate, the CSL story about continuing to build value for shareholders should still have much longer to run. Pick your moment. Be ready.

Rudi Filapek-Vandyck is a financial author, one of Australia’s most respected independent market analysts and founder of leading independent equities research site FNArena, this is an edited version of his story, the full report can be found at www.fnarena.com      

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