Australia's biggest biotechnology company CSL Limited (ASX: CSL), has shot skywards in recent months, rising more than 35% since January. The last five months have added a casual $18 billion to the company's then- ~$42 billion market capitalisation.
Have CSL investors become too bullish? At the company's current price tag, it would take 34 years for the business to make its money back, assuming earnings stayed constant.
Of course, there are several reasons to be bullish on CSL. First is the company's reliable network of plasma collection giving it a competitive edge, as it was recently able to take market share during a supply shortage at competing businesses.
Second, CSL has a promising R&D pipeline of upcoming treatments, which could add meaningfully to sales in the years ahead. CSL's CEO was also bullish during a recent interview, claiming the company has a good game plan and potentially '3 good years ahead'.
I don't think you will find much argument among investors that CSL is a good business. The crucial issue for investors is to decide whether it is a good prospective investment. In effect – does today's price and the business' prospects give you a decent chance of achieving market-beating returns over the next decade?
If you thought that the business could grow its profits at 20% per annum every year for the next 10 years, CSL is unquestioningly cheap. However, the company will probably not achieve that rate of growth. While it was handed a significant free-kick in recent times due to the supply shortage at competitors, several of CSL's key products (e.g. immunoglobulin) compete with other manufacturers. The effect of ongoing share buybacks on earnings also become less effective with the share price at these high levels.
It's a tough call, but at today's prices I'm leaving CSL on the shelf.
