Not so smooth sailing: Carnival Corporation has come under revenue and selling pressure due to the global CORVID-19 outbreak. Pictured is the Costa Fortuna.

Portfolio updates w/c 2/3/2020

With the market meltdown in full swing, I decided to push some money into my Stake account and make some portfolio updates. Looking for some deep value in dividend stocks, I ended up with two new positions.

ADD: Carnival Corporation & Plc (CCL) @ $31.83

Kicking of with a new starting position, I have been looking at CCL for a long time now. I had been putting it off, and concentrating on getting some bulk to existing holdings. New positions were being ignored. That ended today with a purchase late into Tuesday’s US session.

Hunting for deep value stocks, and nothing has been hit harder than CCL in the COVID-19 outbreak than the cruise lines. Carnival is my pick here due to lowest unit cost, highest yield and local operations here (under P&O). If I able to accumulate enough stock then I am more likely to take advantage of the shareholder benefits on a cruise.

The dip in share price late in the session gave me an entry point, and while not quite as low as early Friday morning, my account funding had not cleared in yet. Jeremy over at Telsa Education Financial Education channel on Youtube is buying, as are a number of other financial youtubers. I may take a second bite later this week and average into a larger position.

AVG DOWN: Vermillion Energy (VET) @ $10.16 avg

Vermillion has been one of my longest-held stocks in the reasonably short life of my US Portfolio. I like it for high yielding monthly dividends and I am sure some out there will cry ‘high risk!”. Yes, it is not totally without risk, however today I doubled my holdings in two buy tranches. This resulted in a significant reduction in average cost price.

There is something to be said about seeing solid cash amounts being paid to you each and every month. It certainly keeps you on track and focused. I will write a post about my thoughts there at a later time. Just $500 spent today provides an additional annual return of $104.30 on a forward basis. That is an annual return in excess of 20% p.a.

This stock has been beaten down on oil price concerns and a Natural Gas supply glut in Europe which it is exposed to. Some think that the dividend is at risk however it seems to be well covered by cashflow right now. A rising oil price after the COVID-19 outbreak as China energy demand pumps upward will help drag it up. I expect to see around $15-$17 range and a profit for my stock holding.

ADD: PepsiCo, Inc (PEP) @ $135.58

Opened a second position today because… well I could. And the shackles were off today with my Carnival buy. Pepsi is a solid consumer staples company with some nice brands and diversification in snackfoods, cereals, rice and pasta. It is not just a drinks company.

Just a single share purchased as I was looking for an additional January payer to help bolster income in that month. One of my goals is to smooth down my cashflow outside the 2nd month of a quarter. A single share will focus me on growing the position. More to come with this one of course, but it sits alongside my single Coca-Cola (KO) share.

AVG DOWN: Prospect Capital Corporation (PSEC) @ 5.71

Here is another stock that pays monthly yet is looked down upon by many investors. Yet with over 100 shares, this is producing a stable, 6c dividend per share every month. The purpose of this holding is cashflow, and the ability to DRP one additional share every month, and also write covered calls to further boost returns.

A stock like this is a reasonably small position in terms of deployed cash. You are also not emotionally attached to the holding is perfect for covered calls. If your stock does get called away, you have made additional cash from selling the option and getting your cash for the shares. You can either use the proceeds to buy other shares, or plough it back into the same stock on a pullback.

I am not quite to where I would like to be with this stock, but with a 12% starting yield right now, it won’t take long to build it up and then deploy that cashflow into other positions.

Possible targets for the remainder of the week

At this stage, for further portfolio updates I would like to try to pick up some more 3M (MMM), Cyrus One (CONE) or InterPublic Group (IPG) to build larger positions. AT&T (T), Verizon (VZ) and Pfizer (PFE) are also targets to accumulate.

EDIT 2/3/20: Additional tranche of CCL was purchased at $29.98 on limit order placed prior to Thursday’s session. Although I had seen the negative news for CCL, I had not expected it to drop so much during the session, and as such had set up a snipe if it fell under the $30 mark. Not the ideal outcome at the end of the day but I will continue averaging down on CCL.

The author is long on the following US-listed stocks: CCL, VET, PEP, PSEC, KO, MMM, CONE, IPG, T, VZ & PFE.
The author has no position on other stocks mentioned, including no short positions.

Simply Wall Street also has provided a valuation, which is currently at $263.82 for a 27.5% overvalued rating.

Is CSL a buy at $336?

Commonwealth Serum Laboratories (CSL.AX) has now reached hit a price of $336.40. But is it worth the price? Is CSL a buy?

We should consider CSL’s stellar run over the last 10 years. Investors that purchased CSL just after the GFC will have seen 1000% gains. Is a P/E of 50.49x, and a P/S of 12.59x simply too rich of a valuation on CSL? It would be a brave investor to go short against this 10-year chart:

The consistent capital and dividend growth in CSL over the last 10 years make it a unicorn stock. If you invested in 2011 at approximately $30 per share, you now have a ten-bagger stock. Even investors in more recent times have been able to make huge gains. If you purchased CSL in the 2018 correction, you would now only be just short of a 100% gain.

Dividends have also risen over time, with a doubling in dividend paid in the last 6 years. This has no doubt helped the share price rise. But does a 10-year total return averaging 27.5% per annum deserve such a high price?

What is driving CSL higher?

After announcing results recently, an already in-demand stock has gone higher. An 11% rise in Net Profit after Tax (NPAT) seems the most recent cause of CSL shares rising sharply.

At the current time, most of the revenue growth in CSL is being driven by their ‘CSL Behring’ business. Behring is doing well due to global demand for immunoglobulin (IG), otherwise known as Antibodies. These are produced from collected blood products, mostly blood plasma. The plasma is processed to separate out the component products, of which immunoglobulins are just one. These products are then used in medical therapies to treat certain medical conditions.

There are a number of manufacturers of these types of products, however they seem to not be able to expand their capacity. Global demand is rising, and supply is not keeping up. Prices are therefore rising quickly and CSL has been able to expand their capacity to take advantage of this. Higher sales and expanding margins make shareholders very happy. CSL’s two flagship products saw sales growth of 28% and 37% on the previously reported period.

The other CSL businesses have had strong performances also however not quite as well as the IG business. Influenza vaccine sales in their ‘CSL Seqirus’ business were up 16% over the previous period.

These expanding margins which would push any stock higher are being magnified by a weaker AUD. Since most of CSL’s products are sold in USD, higher revenues get magnified when converted to AUD.

Expensive by any measure

Valuation of CSL is difficult by its nature, and lack of direct peers in the market. Some of the competitors overseas are having significant issues in production capacity and specifically in IG products. This is dragging on their results and is a missed opportunity and simply hands market share to CSL. With the current ability to scale, CSL is benefiting from the market demand, higher prices and favourable forex rates to generate profits.

Our valuation metrics show the following numbers for CSL as at ASX close on 21/2/20:
Price: $336.40
P/E: 50.49x
Starting Yield: 0.853%

DCF Valuation: $262.40 (+28.20%)
DDM Valuation: $222.56 (+51.15%)

In this case, the DDM valuation does not provide a significantly useful result due to the high dividend growth of CSL, currently running around 15% an a TTM basis.

What about other valuations?

Morningstar is currently valuing CSL at $246.59 as at February 20. Their figures suggest that CSL is 37.35% overvalued
Morningstar’s slightly more conservative valuation says CSL is 37% overvalued as of 20th February, 2020.

We took a look at other valuations from various data providers. Morningstar is currently valuing CSL at $246.59 as at February 20. They are known to be a little more conservative with their valuations and ‘star ratings’ than some brokers or other analysts. Their figures suggest that CSL is 37.35% overvalued.

Simply Wall Street also has provided a valuation, which is currently at $263.82 for a 27.5% overvalued rating. We have generally been very impressed with the modelling from Simply Wall Street. The design of the site is excellent, and the information is easy to read and understand.

Simply Wall Street also has provided a valuation, which is currently at $263.82 for a 27.5% overvalued rating.
The data presented at Simply Wall St is indeed simple and powerfully presented. It is very easy to understand the valuations there. The above data was taken after market close on 21st February, 2020.

Forex risks coming

The bulk of CSL’s revenues being denominated in US Dollars. Part of the performance since 2011 is the AUD weakening against the Greenback. In 2008 the GFC raged, the Aussie went beyond parity with the US Dollar, buying over $1.10 at one point.

The end result for investors is a drop in revenue in AUD terms when the AUD rises. In 2008 as the AUD rose, we saw the dividend cut to compensate for the USD weakness. The share price also didn’t do very well in this period.

After the AUD rose to over USD$1.10 after the GFC, the share price and revenue growth were heavily hamstrung.
CSL, The lost years: After the AUD rose to over USD$1.10 after the GFC, the share price and revenue growth were heavily hamstrung.

With the AUD crashing to the 66c mark this week, recent gains may be due to currency fluctuations. The CSL share price will likely come under pressure in the near term if the AUD rises again. A number of economists have put the fair value of the Aussie at around 70 cents. This implies a six percent downside on currency, but that is not borne out by the recent share price action.

Debt ratios are a concern

One of the major concerns is the level of debt currently on CSL’s balance sheet. While debt is not always a bad thing, the amount needs to be controlled. CSL is a capital intensive business and with that comes a need for debt. Total debt/equity ratio is over 92%. CSL is definitely on the higher side of where we would like it to be.

While the dividend payout ratio is low at just over 44%, the concern is that if the AUD strengthens then the revenues will be lower. This puts the payout ratio under pressure, and reduces cash to pay down some of that debt. With a chart that looks more like Tesla the the debt levels raise questions on how CSL will react in a market pullback.

Where is the value?

To get value, I would like to see CSL pull back a significant amount. A drop of around 15% would give a share price of around $285. With a 18% drop it would be priced around $277. Below that I would slowly accumulate wherever I could. CSL would then be back to trend and the market premium on the stock insignificant.

While I am not a technical chartist, it looks like a retracement back towards the trend may be possible. The September 2018 retracement took the stock right back the long-term rising trend. It would appear continuing that long-term trend would put CSL close around the valuation we come up with. I note that the resistance at $285 and support at around $277 between late November 2019 and January this year. Any breach of that $277 support level may present a useful buying opportunity.

My view is that it will take something like an external market shock or general correction for this to happen. CSL is experiencing strong company fundamentals and is slaying their competition with the AUD giving them an additional boost.

Definitely worth waiting

Is CSL a buy? As one of the highest quality companies on the ASX, it always is a company to buy. That said, even the average investor would say that the premium is excessive now. Save your money and get ready to strike if the share price comes back down.

For dividend investors this is not the stock you are after to meet your income goals. It is however an excellent capital growth stock and would not be out of place in any ASX stock portfolio. Just as capital appreciation investors should not ignore all dividend stocks, dividend growth investors should not ignore capital growth stocks. While CSL is clearly both, it most certainly is leaning to the capital growth side in recent times.

DISCLOSURE: At the time of writing, the author held no positions in CSL (aka CSL.AX, CSLLY), and does not plan to trade on this stock within the next 7 days.