CSLs earnings growth has been very slow relative to its history. This is due to the industry-wide drop in plasma collection volumes, which was caused by US movement restrictions. COVID-19 is now in a more manageable phase so we don’t expect similar restrictions to have any impact on CSLs earnings moving forward.
The cost of collections has risen and it is unlikely that this will normalize to pre-COVID levels. However we are confident that CSL will be able to maintain its cost leadership. This will place it in a stronger position than its peers when pricing and the ability to pass on these cost pressures. We believe that the share price should reflect this level of earnings growth and certainty.
Have you ever been involved in an IPO?
Siteminder stands out among the recent IPOs. Siteminder is a long-duration growth company that uses a large market address and low penetration rates to support its hotel management platform. The company has been adversely affected by travel restrictions in most countries over the past few years, but has performed well operationally.
Siteminder is still at an early stage of its growth. It is investing heavily in its expansion and is therefore yet to achieve profitability. Despite good operational execution and a large market, the market’s rising yields environment has increased valuation risk. This is unlikely to support the share price performance in near term.
What do you think is the best stock that the market is overlooking?
Healthcare is a sector that typically offers earnings certainty. Investors find the sector’s quality characteristics attractive when there is increased uncertainty. The market overlooks this aspect at the moment and healthcare has continued its underperformance despite greater market uncertainty.
Although valuation risk for big healthcare companies is still high, current-year earnings of CSL or Cochlear are still negatively affected by COVID-19 disruptions. This valuation risk is not as high as it seems, especially considering that the main impact on earnings from COVID-19 was due to lockdown restrictions.
We must not get another deadly virus or one for which the current vaccines don’t offer protection. This disruption should not happen again and earnings growth should return back to normal.
Which stock is best positioned to withstand rising inflation/costs?
Stocks with strong non-discretionary and strong demand are more likely to outperform in an inflationary environment. This gives them strong pricing power. In recent years, a number of companies in different industries have re-priced to account for cost inflation. To do this on a regular basis without any pushback from customers or decrease in volumes, however, it is necessary to have a strong, non-discretionary, and sustained demand.
Many healthcare companies fall into this category: CSL, Cochlear and ResMed have strong pricing power, backed by sustained, non-discretionary demand.
We like Goodman Group as a developer and manager of industrial real property in locations where there is limited land and low competition.
In a rising inflation environment, other important attributes include a strong balance sheet that allows the company to continue to invest in important initiatives despite inflationary pressures. Also, the ability to deliver self-help or maintain its cost leadership within its industry. This allows companies to price their products more competitively than their closest competitors, which increases their customer demand.
Are there any podcasts or TV shows you are enjoying recently?
I’m enjoying WeCrashed at this moment. It is surreal to see the story unfold, even though we all know it.
Which local restaurant is your favorite? What is your go-to dish?
Fenwick in Balmain East is a place I love going to. It’s close to home, offers a great wine selection, and we have celebrated many special occasions here lately.
