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Deep dive into CSL, NUF & IPH and charts on China risks

Fund Manager Chris Pedersen looks at CSL (ASX:CSL), Nufarm (ASX:NUF), IPH (ASX:IPH) and charts on China risks.

The following transcript was automatically generated:

Hello. My name’s Chris Patterson, and this is Stock Watch for Wednesday, the 22nd of November 2023. Any advices? General advice may not be suitable for you. Always consult an advisor before making any investment. All questions from viewers should be sent to stock. Watch it f an intercom dot edu. Some of my market observations. One We’re in an El Nino weather pattern.

What this means for Australia is drought. This also means that people living on the land are going to struggle. We have more people from immigration. We need more water and we have the same infrastructure. Something’s going to give in the future. The Aussie ten year bond yields are at 4.46 after being close to 5%. The significance of this is that lower ten year bond yields, you can also look at seven year.

If you what means that equity price valuations will glow, ten year bond yields are 4.46% after being close to 5%. What this means is lower yields help equity price valuations. The RBA came out with the minutes yesterday and they were more hawkish than we thought. There’s possibly another 1 to 2 more rate hikes. Surprise. This is not good for long term equity pricing.

During this period of possible rises, super benefits paid third quarter this year was $29 billion. That’s a huge amount. Total super paid over the past four quarters is estimated to be 145 billion. This is post COVID, by the way. Super growth in the third quarter though, was 300 billion. So super assets are growing phenomenally fast, but we are withdrawing money as people need money for household expenditures and retirement.

10% of household spending is attributable to super withdrawals. Stopwatch performance A service stock Watch again on 19th of July this year and today’s 22nd. The performance of the companies that I’ve covered versus the ASX Accumulation index is that if you did everything that I showed you, you’d be better off by close to 2%. This is not annualized, by the way.

Here’s an amazing chart that caught my eye. This is inflation in the United States, but it’s not the inflation that matters. Look at the yellow bars. There’s tremendous variations month to month in the statistics. Thus, when we hear the CPI, is this for this month, this for next month. Well, just remember what you really have to do because there’s always these wide variations.

Look at a chart that smooths it out, the black line. This always gives you a better picture. Jumping on one month of statistics is not very smart. Here are sanctions against China. The red is during Trump. The yellow is during Obama. The black is during current president Joe Biden. And this chart is very important because our economy is linked to the Chinese economy.

The yellow is investments going into China. What you see on the far right is the yellow is down to negative now. This is the first time in history, or rather, I should say, since China opened up to the west. Here’s another interesting statistic. Human activity produces more than 100 times more CO2 than the average volcano. Well, this is fascinating because we hear all the time that one big volcano has a huge impact.

And makes human activity minimal. Well, that’s not the truth. This is from a Bloomberg column on 19th of November 20, 23. Three companies I wanted to cover today, they’re sort of defensive. CSL, this is a health care company. Blood plasma, to be more precise. Here is a chart. This company has been a high flier since 1994 when they floated at $2.

It got to a peak of $336. Well, look at the recent price action. It’s been down. However, if you look at the far right, you see it’s starting to bounce back up. Let’s look at the fundamentals to see what is the prospects for CSL. It’s been a long term winner. Will it continue to be a price performer? This chart is revenue composition by different product, which is fascinating when you take a look at it.

And this is revenue growth by different products. What you see is the revenue growth rates are starting to tail off. So you worrisome like is this a trend that’s going to continue? What is driving profits? Well, here is group gross margin. Their profit margin is expanding. That’s the key to their profitability right now. However, when you look at total revenue income, their revenue growth is still remaining very attractive.

Here is revenue by region. You see the United States is the largest and Asia-Pacific, which includes Australia, is nowhere nearly as big as you would expect. Here are the fundamental numbers. First off, it has a market cap of around 125 billion. 12 months price target. I have a $300, so that’s a pretty big increase from where it is now over the next 12 months.

The broking community average is around $322. I think that’s a little bit rich. The revenue growth rate estimates from 2023 to 2026 is over 10% per annum. That’s a very attractive. The earnings per share growth in the same period is even better. I mentioned expanding margins. Well, here you see it, the profit per year is increasing by more than 18% per annum.

Meanwhile, the dividend growth rate is increasing close to 15% per annum. So two of my big Matrixes earnings growth and dividend growth, this company takes both the P on the 2025 earnings estimate of $10.78. Now you have to bear in mind that CSL because it is so big globally that analysts report everything in US dollars, you have to convert the US to Aussie.

I’m using an exchange rate of $0.65 by the way. So the earnings are $10.78 Australian. This is only at 23.8 times PE for a company with these growth levels. That’s cheap. The yield on the 2025 dividend estimate of $4.65 is only 1.8%. This company is not a yield stock, it is a growth stock and it continues to grow.

Its free cash flow is 4% and it has a payout ratio of only 40%. This company hoards retained earnings for acquisitions and growth and manufacturing, etc. It is one of Australia’s best growth stories since the nineties. I like this company for another reason. The CEO for a long time is Brian McNamee. He is now chairman. He knows how to run a business and grow business and have them be profitable.

I rate it still a buy. Next company is Nufarm on the ASX. The code is in US close last night at $4.58. Look at this chart. It’s absolutely terrible. However, it is starting to tick up on the far right. So let’s take a look. Is this a prime time to buy or should you avoid it? This is regional.

If it does for 2023. And what you see is that this also is a global company. It is not very dependent upon Australia. Here is about growth from Morgan Stockbroking for 21, 22, 23, 24, 25 and 2026 estimates. You see that this company has very good growth prospects. But one thing that’s important is their seed technology is a real driver of growth.

The other part of their businesses crop protection mechanisms. Here are the fundamentals to Nufarm. One has a market cap of only 1.8 billion as 12 month price target. Mine is $6.09. That’s a little less than others because I’m a little bit more conservative. The revenue growth from 2023 to 2026 is only 4.3% per annum. However, at that period of time the estimates are 11% per annum and dividend growth in that period is 6% per annum.

The PE and 2025 earnings estimate of $0.42 is only 10.9 times or less rounded to 11. The yield on the 2025 dividend estimate of $0.11 is 2.4%. So you’re getting some yield out of this company. It has free cash flow, which is one reason I love it. Of 9.6% and a payout ratio of only 20%. So global agriculture seed and crop protection company.

What is crop protection? It is like insecticides and other things to protect crops against weather or insects. It’s globally diversified from drought. That’s very important. And the reason I like it is that I feel the company is cheap here in Australia where it trades on the ASX because we’re worried about drought, but a lot of their earnings is not locally based.

El Nino creates rain in the Americas and a lot of their income comes from the Americas and Europe. They won’t have drought. They will have abundant rainfall. My feeling is I would wait until this company rallies to around five. Just to be sure that it is turning around. Analyst Expectations are great, but once again it’s just a crystal ball.

Extrapolating the past and looking at management. If anything, I rated by for now and then increase if it gets to near five. Third companies. IPH Ltd. Code on the ASX is IPH and it closed last night at $6.85. This is a third company where the chart pattern looks negative. If I was a technical analyst, I’d say, Chris, you’re crazy.

But let’s look at the numbers, because often when a company is low, but the fundamentals are strong, I can pretty much guarantee that the value funds will start to buy it. That will cause the price to go up. So even though the chart looks negative on a fundamental basis, the institutions will turn the price around. I have a market cap of 1.7 billion for this and a price target of 8.95.

That’s a pretty big move from where it currently is. The revenue growth I’m looking at 2024 to 2026 because 2023 earnings are skewed outside of the normal range. Looking at 2021 22, the annual growth rate is only 2.9% per annum. However, the earnings growth rate is seven and a half percent per year and the dividend growth rate is up there also at 8% per year.

The PE on a 2025 earnings estimate at 48 and a half cents is only 14 times. Meanwhile, the yield on the 2025 dividend of $0.39 is 5.7%. This all looks very solid. Has free cash flow way up there at 8% and a dividend payout ratio 80%, which it’s a little on the high side, but that’s okay. They have great free cash flow.

It’s the largest intellectual property services group in Asia-Pacific. The value is attractive out by halfway and increase as the price starts to rebound. Now, as an aside, the chairman of IPH is Peter Warne. I know him well. He’s an excellent chairman. He was chairman of Macquarie Group and they performed amazing under them. He’s been on other boards and on those companies they have also performed.

So this is partly a bet on strong board and management. Again, I rated it halfway by and by more as it starts rebounding. As always, if you want to learn more about anything I covered today, send an email to stock. Watch it f and accommodate you and make sure you direct it to me. Chris Patterson. I hope you have a wonderful week and it’s profitable.

Thank you for your time.

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