High on uncertainly low on risk, a classic Dhandho investment.

“Wall Street sometimes gets confused between risk and uncertainty, and you can profit handsomely from that confusion. The Street hates uncertainty, and it demonstrates that hate by collapsing the quoted stock price of the underlying business.” Mohnish Pabrai, The Dhandho Investor.

The uncertainty has been created by CSL’s bid for Talecris Biotherapeutics Holdings Corp and the FTC disallowing that bid. A secondary concern is the high proportion of income exposed to “falling” USD and EUR currencies, 37% and 35% of sales respectively in 2008. Those uncertainties do not change the underlying growth story at CSL. Growth has slowed, but is still strong.

• Strong balance sheet.
• Increasing margins.
• Operating cash flow and earnings increasing faster than sales demonstrates the leverage in the business.

Analysis PDF: Initial Analysis and Valuation of CSL Limited (CSL.AX)

[Update: Wow! A day after writing up my thoughts on CSL the board announces they are terminating the merger agreement Talecris. There goes the uncertainty, but wait there’s more…here comes some certainty. The board also announced they are starting a share buy.

on-market share buyback of up to 54,863,000 shares¹. This represents approximately 9% of the company’s current shares on issue. At an assumed price per share of approximately A$29 (being CSL’s last closing price on Friday 5 June), this would represent a total buy back consideration of up to A$1.59 billion.
Dr McNamee, CSL’s Managing Director said, “Last year investors supported CSL with its Talecris acquisition plan by participating in the equity raising. Given the company will no longer be acquiring Talecris we think it appropriate for funds to be returned to shareholders.”
“The buyback will improve investment return ratios such as earnings per share and return on equity to the benefit of shareholders.”
“We are committed to managing the company’s capital structure in the interests of our shareholders. Given the Company’s strong cash flows and balance sheet position, CSL is expected to retain a prudent level of gearing following the buyback.”
Shares will be purchased on-market during the twelve month period commencing 23 June 2009².

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