@JoeGambler,
This is a truly great question, and one which is probably the most critical one when it comes to contemplating investment in any long-duration, structural growth company, such as CSL.
Inflation has a dual impact on CSL:
1. Transactional2. TranslationalThe
Transactionalimpact relates to the matter of the rate of increase of business inputs, and the ability for those increases to be matched by price recovery. Which is basically the discussion you are raising.
In that regard, in theory CSL's suite of proprietary products mean that it should enjoy ample pricing power to offset input cost inflation.
But there is an ethical limitation to the extent that this can occur before it risks attracting criticism of price gouging, because CSL is a highly profitable business, generating almost 60% GP Margin, 30% Operating Margin and ROE of close to 35%.
So if input costs for CSL rose sharply, it would be difficult for CSL to adjust its price list instantaneously to restore its prestigious margins and financial returns.
Certainly, I suspect the company's executives would be acutely aware of not wanting to contaminate the company's responsible corporate citizen reputation, what with it being a company operating in the healthcare sector. There is something ideologically unsavoury about excess profit being generated in the business of providing healthcare services.
The
Translationalimpact - which your post did not consider - is the far more forceful one because it drives valuation dynamics. Interest rates (which are outworkings of inflation) are implicitly used by the market in the determination of discount rates for deriving present values for assets. High interest rates feed higher discount rates which, in turn, yield lower present values. And vice versa.
There can be absolutely zero doubt that what has driven the secular and spectacular increase in P/E multiples CSL - not just CSL, but all listed securities - in recent years (well, since the GFC, really) has been the sheer collapse in bond yields.
This has been a powerful tailwind for equity markets for the past decade, and then some (which is a period which probably exceeds the time that a great many people have been investing(!), so there are vast swathes of investors today who know of no investing environment other than one of ever-cheaper money sloshing around the globe in ever-increasing quantities.
View attachment 3350795I can remember quite clearly being able to buy shares in truly high-quality businesses, such as ARB, ASX, BRG, CAR, COH, REA, REH, RMD, SHL, WES, and yes, even CSL, at P/E multiples at around 20x, and even below it.
A stock with P/E multiple of 25x for any decent period of time was seldom encountered a decade ago, and if a stock somehow got much above 30x, it would be written about in the financial press with great astonishment for doing so.
Yet today, people don't question paying 45x P/E for these sorts of stocks.
(In fact, people who do question the wisdom of doing so, are the ones who "don't get it").
But a pretty extraordinary thing is now happening in capital markets
In recent months there has been a torrent of anecdotal evidence about inflation coming down the pike - inflation induced by robust aggregate demand (fueled by hyper-stimulating governments around the world) coinciding with congested supply chains as a result of Covid.
Then, last month, the anecdotal observations were confirmed by official data in the US, where latest monthly inflation figures implied an annualised rate of 5% (a 13-year high), while core inflation (which strips out certain volatile factors such certain foods and fuels) was 3.8% (itself the highest level for something like 30 years):
The response to this from the bond market?
Nada.
Zilch.
[*] Coincides with the release of latest US CPI figures
So,
real bond yields are todaythe most negative they have been since as far back as I am able to find data (which is over 60 years), with the sole, brief exception being during the mid-1970s, when inflation was running rampant (it hit almost 20% in the US at one point in the wake of the 1970's oil crisis).
I have great respect for the collective wisdom of bond investors (I think they are inordinately smarter than equity investors) and in this case bond investors are totally ignoring the latest inflation numbers.
And if the bond market is, in fact, correct and that inflation we are currently seeing is merely transient, then this time next year those negative real yields will normalise without any need for bond yields to rise.
Which would continue to underpin equity valuations, including the very elevated valuations of long-duration growth stocks such as CSL.
But if the bond market ends up being wrong and the latest inflation numbers are not merely a temporary head-fake, but reflect something more structurally entrenched, then the bond market has absolutely no spare wiggle room left.
Events of the past few days have left bond yields even more tightly coiled than they already were; any deviating from the current position of "
Inflation? Meh.", as implied by the current record negative real yields, will see the bond market get crunched.
And along with it, P/E multiples.
[Adapted from :
https://hotcopper.com.au/posts/53846312/single]This is no time to be flying so close to the sun, I don't believe.
I tend to do my best to be fully invested at all times (otherwise I am effectively trying to time the market, which I'm not smart enough to do).
But there are fewer undervalued investment opportunities available today than I can ever recall in all my years of investing (even the madcap dot-com bubble years there were pockets of the market that were undervalued; ditto for the boom years immediately prior to the GFC).
But I've never seen anything like what equities are priced liked today.
Which has left me holding more cash (along with some unavoidable CGT obligations) than ever before in my entire investing career.
As a believer in Critical Theory, it feels to me like we are close to the falling of the critical grain of sand.
https://nautil.us/issue/23/dominoes/the-amazing-autotuning-sandpile.
.
(20min delay)