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CSL’s shares sold off

Global biotherapy firm CSL (ASX: CSL) reported a strong set of financial results for the full year to June 2013 on Wednesday, however it’s been an unpleasant week for the company’s share price.

After opening Monday morning at $65.55, by the close of trade on Tuesday the stock had climbed to within a whisker of its all-time high of $68 in anticipation of the results. On Wednesday morning, with the results released to the market, the stock opened down 3% at $65.66 with that downtrend continuing through the rest of the week. By midday Friday the stock was trading at $63.37, down around 6.5% from the high reached on Tuesday.

To recap, these were the highlights from CSL’s results:

  • Sales rose 7% to US$5 billion
  • Earnings before interest and tax rose 17% to US$1,486 million
  • Net profit after tax rose 19% to US$1,216 million
  • Earnings per share rose 24% thanks to an on-going share buyback to US$2.44
  • Final dividend declared of US$0.52 cents per share, taking the full year dividend to US$1.02 per share, up 18% on the prior year.
  • The board announced it would consider a further share buyback

CSL’s management said the next 12 months would be tough and provided guidance for financial year (FY) 2014 of net profit after tax (NPAT) to grow by 10% with earnings per share (EPS) growth to exceed NPAT growth thanks to past and proposed management initiatives. Assuming this could lead to EPS growth in FY2014 of approximately 15%, an EPS figure of A$3.07 at current exchange rates could be expected. This places CSL on a forward price-to-earnings (PE) multiple of 20.7.

It’s been a mixed results season so far for investors in the healthcare sector. Shareholders in Cochlear (ASX: COH) were faced with a fall in earnings, however a boost from a new product release should see a stronger FY2014 result. While Resmed (ASX: RMD) continued its history of strong growth and surprised shareholders with a big increase in its dividend.

Foolish takeaway

Healthcare stocks have a history of selling at lofty valuations. Often this is justified but it does mean shareholders need to be extra vigilant. CSL shareholders currently need to be asking themselves if a PE multiple of over 20 times — given EPS growth of possibly 15% — is justified.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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