Chris Leithner

Why CSL will likely underperform term deposits

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Its long-term returns have been outstanding. Yet eroding fundamentals and today’s prohibitive valuation imply tomorrow’s mediocre return.

CSL Ltd isn’t merely an Australian success story: it’s also a global leader of its field. In recent years it’s ranked among the largest (by market capitalisation) companies listed on the ASX (on 7 March it ranked third, behind CBA and BHP, at $126 billion), and over the decades it’s richly rewarded its shareholders.

On these and other criteria, it’s undoubtedly an outstanding company. But an exceptional company isn’t necessarily or always a great investment; indeed, it can make a mediocre or even a poor one.

At its current valuation, and given the slippage over recent years of several of the tectonic plates that underpin its valuation, during the next 5-10 years CSL isn’t merely likely to underperform Australian stocks as a whole: it’s also unlikely to outperform a five-year term deposit. This article justifies this startling (to its admirers and supporters) conclusion.

A Brief History

Let’s commence with what’s surely an uncontroversial – indeed, unremarkable – statement: CSL is an Australian-based, globally-significant company which researches, develops, manufactures and markets biotechnology products. Its specialities include blood plasma derivatives, vaccines and anti-venins, and cell culture reagents (which are used in various medical and genetic research and manufacturing applications). Established in 1916 as Commonwealth Serum Laboratories, until its privatisation and listing on the ASX in 1994 (under the name CSL Ltd) it was wholly owned by the Commonwealth Parliament.

Its major achievements, according to The Australian (“Blood, sweat and tears of the CSL century,” 23 April 2016), include:

  1. the production of insulin for treatment of Australian diabetics (1923);
  2. the creation of a tetanus vaccine (1938);
  3. the development of a combined vaccine for diphtheria, tetanus and whooping cough (1953);
  4. the rapid production of the polio vaccine (1956);
  5. the introduction of Rhesus (D) immunoglobulin to prevent haemolytic disease in newborns (1966–67);
  6. the creation of a pioneering heat treatment to protect blood and plasma products from infection with HIV (1983);
  7. participation in the development of the world’s first human papillomavirus vaccine (1994-2005);
  8. the manufacture (in co-operation with AstraZenica) of the Oxford University COVID-19 vaccine (2021).

Since its privatisation and listing, CSL has become a global leader of its field. It’s grown organically and via the acquisition of other businesses. Among its major purchases:

  • in 2000, it doubled its size by buying ZLB Bioplasma AG (a Swiss plasma company founded in 1949) for ca. $5.1 billion;
  • in 2004, following its purchase of Aventis Behring (a Franco-German bio-pharmaceutical company founded in 1904) for ca. $1.3 billion, it became the world’s biggest plasma products company;
  • in 2016 it acquired Novartis’ influenza vaccine business for ca. $US275m, and created Seqirus, one of the world’s largest influenza vaccine manufacturers;
  • in 2021, it extended its global leadership via the acquisition of Vifor Pharma AG, a global specialty pharmaceuticals company founded in Switzerland in 1872, for $11.7 billion.

In 2022, CLS rebranded and restructured. Its major divisions became CSL Behring, CSL Plasma, CSL Seqirus and CSL Vifor.

CSL’s Long-Term Outperformance – and Recent Underperformance

From the uncontroversial, let’s now proceed to the indisputable: over the years, CSL has greatly outperformed most other Australian stocks and the All Ordinaries Index.

Figure 1 plots the course of investments of $100 in CSL and the Index from June 2000 to December 2024. The disparity of total (dividend and capital growth), returns, adjusted for buybacks and issues of shares as well as consumer price inflation (as measured by the Consumer Price Index), is stark. An investment of $100 in the Index grew to $368 in late-2024. That’s a compound annual growth rate (CAGR) of 6.9% per year. An investment of $100 in CSL grew to $1,541. That’s a CAGR of 15.1% per year. Clearly, CSL has massively outperformed.

Figure 1: Investments of $100 in the All Ordinaries Index and CSL, CPI-adjusted, June 2000-December 2024

Having outlined the uncontroversial truth that CSL has become a great company and the indisputable truth that over the long term it’s massively outperformed, I’ll now proceed to an unarguable but uncomfortable truth: no company can outperform indefinitely.

Figure 1 also demonstrates what’s less widely appreciated: since 2021 CSL has underperformed the Index. From June 2021 to December 2024, the investment in CSL sagged from $1,953 to $1,541; that’s a CAGR of -6.5% per year. Over the same interval, the investment in the Index rose from $349 to $368; that’s a CAGR of 1.6% per year.

Figure 2: Investments in the All Ordinaries Index and CSL, Five-Year CAGRs, CPI-adjusted, June 2005-December 2024

Figure 2, which plots the total, CPI-adjusted returns of CSL and the Index over the medium term (rolling 60-month intervals), elaborates this result. During the five years to mid-2008 CSL generated enormous returns: at their peak (August 2008) they neared 55% per year! Then came the GFC: five-year CAGRs plunged until they reached their nadir (2.8% per year in the five years to February 2012).

Medium-term returns then accelerated, reaching another peak of almost 30% per year in the five years to August 2016. Since, then, however, five-year CAGRs have decreased and turned negative. During the five years to November 2024, CSL generated a total, CPI-adjusted return of -3.2% per year.

That’s a total loss of (1.0 – 0.032)5 = 15% over this interval – CSL’s worst medium-term return since before 2000.

For each of the two series in Figure 2, I’ve computed CSL’s medium-term return relative to the Index: for each month, in other words, I’ve subtracted the Index’s CAGR from CSL’s Figure 3 plots the results.

Figure 3: CSL’s Five-Year CAGRs Net of the Index’s, CPI-adjusted, June 2005-December 2024

Since 2005, CSL’s medium term CAGR has averaged 17.7% per year; the Index’s, on the other hand, has averaged 5.9%. CSL’s has thus exceeded the Index’s by an average of 17.7% – 5.9% = 11.8 percentage points per year. Since the depth of the COVID-19 crisis (March 2020), however, when it crested at 25 percentage points, CSL’s outperformance has cumulatively and greatly receded: in January 2012 it fell below its long-term average; in July 2023 it fell below 0% (that is, over the preceding five years CSL began to underperform the Index); and since then it’s underperformed ever more markedly.

During the five years to November 2024, CSL underperformed the Index by 7.9 percentage points – its widest margin in 20 years.

Why Has CSL Underperformed?

Although there’s no formal definition, the concept is reasonably clear: a “growth stock” generates substantial, sustainable and rising revenue and earnings, operating cash flow and free cash flow. How rapidly must these things rise such a given stock will qualify as a growth stock? There’s no fixed answer; yet it’s widely-agreed that a growth stock’s revenue, etc., increase at a faster rate than the average company’s within the same industry, or of all the companies in an index like the All Ordinaries.

On that basis, until the mid-2010s CSL was clearly a growth stock; since 2020, however, it’s been very doubtful – to anybody who examines it dispassionately – that it remains one.

Plummeting Earnings Growth

A couple of years ago, an equity strategist at Wilson advisory lauded CSL (see, for example, “5 Stocks for the Next 5 Years: Long-Term Winners,” 19 July 2023). In support of his bullish position, he cited factors that “are expected to support its earnings growth over the next 5 years. The 5 year earnings growth CAGR for CSL is 17%, while there is earnings upside potential from expected product launches over the coming years. At a current 12 month forward PE multiple of ~28x, CSL looks very attractive on a long-term basis.”

“It’s hard to ignore the $300 target price for CSL,” Kerry Sun asserted more recently (“Has CSL lost its shine as the market’s favourite growth story?” 13 February 2025). He agrees that CSL’s “growth outlook is hard to deny,” and that its “valuation (is) supported by expectations of double-digit earnings growth in the medium term.”

I disagree: CSL’s “growth outlook” is easy to deny. Moreover, given the trend of its earnings over the past 5-10 years, “expectations of double-digit earnings growth in the medium term” are grossly unrealistic.

Figure 4 plots its earnings per share (EPS), expressed as five-year, CPI-adjusted CAGRs, since 2005. I’ve extrapolated half-yearly into monthly observations. Over some 60-month intervals before and shortly after the GFC, its “real” EPS grew at rates of as high as 70% per year. Since then, however, growth has decelerated very rapidly: in the five years to December 2024 – indeed, for all five-year periods since mid-2023 – its CPI-adjusted EPS have grown at no more than 2% per year.

Figure 4: Five-Year, CPI-adjusted CAGR, CSL’s Earnings per Share, June 2005-December 2024

That, to put it mildly, is a far cry from “double-digit earnings growth”! On that basis, is it reasonable to regard CSL as a “growth stock”?

Rapidly Decelerating Return on Equity

A company’s return on equity (ROE) is the ratio of its net profit after tax during a financial year to its shareholders’ equity at the end of the financial year. Although there’s no accepted threshold, a “growth stock” should consistently generate high and rising returns on equity.

By this criterion, a decade ago CSL amply qualified – but clearly no longer does.

Figure 5: CSL’s Return on Equity, per Year, 2005-2024

Figure 5 plots its ROE since 2005. For the first decade it rose rapidly – to an astounding 50% in 2015. Since then, however, it’s fallen drastically – to as low as 13.9% in 2023. That’s certainly not bad (but also not remarkable) for an average stock; equally, it was the lowest in 20 years. Does this level and long-term trend qualify it as a “growth stock”?

CSL’s most recent ROE (15.5% in 2024) is at the lower bound of what conventionally qualifies as a “growth stock.”

 Valuation and Prognosis

“There is no way to predict the price of stocks and bonds over the next few days or weeks,” The Royal Swedish Academy of Sciences correctly stated on 14 October 2013 in the press release that announced that year’s Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel (which is universally but erroneously known as “The Nobel Prize in Economics”). This crucial point also applies over periods of at least several months and occasionally as long as 1-2 years: during these intervals, equities’ prices – and thus their returns – fluctuate mostly randomly.

“But,” the announcement continued, “it is quite possible to foresee the broad course of these prices over longer periods, such as the next … five years” and beyond. “These findings,” the Academy elaborated, “which might seem both surprising and contradictory, were made and analyzed by this year’s Laureates, Eugene Fama, Lars Peter Hansen and Robert Shiller.”

The Academy was referring to one of the reasons that Shiller, an economist at Yale, shared that year’s award: in 1988 he and a colleague, John Campbell of Harvard, devised the cyclically adjusted price-to-earnings (CAPE) ratio. Based upon ideas that Benjamin Graham originated in his classic book Security Analysis (McGraw-Hill, 1st ed., 1934), CAPE measures the valuation of a stock, group of stocks or market index such as the Standard & Poor’s 500. In essence, CAPE equals price (e.g., the S&P’s level at the end of a given month) divided by the average of the past 120 months (ten years) of earnings adjusted for consumer price inflation.

CAPE reliably gauges whether a stock or index is under- or overvalued.

In Irrational Exuberance (Princeton University Press, 1st ed., 2001) and elsewhere, Shiller used the concept of CAPE and data from the 1880s to estimate equities’ returns over timescales of five to 20 years. He demonstrated that higher than average CAPE values at a given point in time tend to generate lower than average subsequent returns; conversely, below-average CAPEs typically produce above-average returns.

Attention critics: in their 2017 paper, “The Many Colours of CAPE” (Yale ICF Working Paper No. 2018-22), Shiller and Farouk Jivraj of Imperial College London found that CAPE was a better measure of valuation any of the alternatives – including those advocated by its critics – they considered. They also “provide further evidence on the ability to use CAPE at even a single stock level.” And their core finding remains: as the CAPE ratio increases, worst-case returns become worse and best cases become weaker.

As a vital aside, Shiller has emphasised that he devised CAPE as a long-term valuation tool – and NOT a short-time signal of impending bear markets, crashes and panics. All the same, high ratios have often presaged such events.

I’ve calculated CAPE ratios of All Ordinaries Index and CSL since June 2010; Figure 6 plots them. The Index’s has averaged 16.0, has trended slightly upwards over time and in December 2024 reached 20.7. CSL’s has averaged 44.0, trended strongly upwards until January 2020 (when it peaked at 74.6) – and since then has fallen steadily, to as low as 37.3 in October 2023. In December 2024 was 41.8.

Figure 6: CAPE Ratios, All Ordinaries Index and CSL Ltd, June 2010-December 2024

In light of its stagnant “real” earnings and falling ROE, is CSL’s sky-high CAPE (relative to the Index’s) reasonable? The answer is obvious: no!

What’s a reasonable CAPE for CSL? The answer depends upon assumptions which will vary from one person to another. Here are three sets and their consequences:

  1. If you’re relatively bullish, i.e., assume that during the next five years (1) CSL’s “real” EPS continues to rise at low single-digit rates and (2) its CAPE remains stable at ca. 40.0, then in December 2030 it’s reasonable to expect a “real” EPS of ca. $8.25 × (1 + 0.03)5 = $9.56 and a share price of $9.56 × 40 = $382.40. Ignoring dividends (CSL’s its yield has long been 1% or less) that’s a CAGR of 6.3% per year and a total gain of ca. 36% – much more than a term deposit (TD) can offer.
  2. If, however, you’re neither bullish nor bearish, i.e., assume that during the next five years (1) its “real” EPS continues to rise at low single-digit rates and (2) its CAPE continues to fall (say, to 35), then in December 2030 it’s reasonable to expect a “real” EPS of $8.25 × (1 + 0.025)5 = $9.33 and a share price of $9.56 × 35 = $334.60. That’s a CAGR of 3.5% per year – equivalent to a five-year TD.
  3. If you’re cautious, that is, assume that during the next five years (1) CSL’s “real” EPS continues to rise at low single-digit rates and (2) its CAPE continues to fall to 25, then in December 2030 it’s reasonable to expect a “real” EPS of $8.25 × (1 + 0.02)5 = $9.11 and a share price of $9.11 × 25 = $227.75. That’s a CAGR of -4.2% per year and a CPI-adjusted total loss of almost 20% – considerably worse than a TD!

Could CSL outperform a five-year TD? Option #1 shows that it could. But option #2’s and #3’s assumptions are less aggressive – and thus more plausible. On that basis, I conclude that it’s likely that CSL will underperform the TD.

Implications

It’s vital to appreciate: an exceptional company isn’t necessarily an outstanding investment. A great company can make (or become) a mediocre or even a poor investment, and an overvalued great company will likely become a mediocre or poor one. CSL is, and will likely remain, a globally-significant enterprise. Until ca. 2015 it grew rapidly, and until 2020 it was a fantastic investment; but since then it’s been poor one – and, given its significant overvaluation, will likely remain a mediocre one.

“Trees don’t grow to the sky.” Sceptics often cite this adage, adapted from an old German proverb, to warn that natural limits preclude indefinite rapid upward growth. Growth leads to maturity; maturity, in turn, leads inevitably to dotage and decline.

I very much doubt that CSL is on the verge of decline. Equally, I suspect that its era of rapid growth has concluded. It’s true that great businesses can grow more quickly, and for longer, than most people expect.

Yet no company can compound both rapidly and indefinitely, and no company can maintain a prohibitive valuation despite sagging fundamentals. CSL is no exception.