Will CSL’s share price go higher?

Australian-based biopharmaceutical company CSL (ASX: CSL) is undoubtedly a fantastic business that has created significant shareholder value. The impressive returns are partly thanks to the ‘moat’ CSL has.

While in theory the ‘moat’ is not particularly wide given the potential for competitors to discover ‘new and improved’ therapies that could displace those offered by CSL. In reality, the breadth of CSL’s product portfolio, coupled with its huge research and development spend and its economies of scale in the production of more ‘generic’ vaccine products all help to create a company with ‘moat’ attributes.

With talk in the financial news of stock markets around the world entering bubble territory and CSL’s own share price up 50% in the past 12 months to a new record high of  $69.75, some shareholders are surely asking themselves, will CSL’s share price go higher?

At least two leading stockbrokers seem to think so, with the Australian Financial Review reporting recently that both Bank of America Merrill Lynch and CSLA have ‘buy’ recommendations on the stock. However while there is positive market sentiment toward the stock, Foolish investors will know that at the end of the day it’s the valuation that counts.

According to CommSec, CSL is forecast to grow earnings per share (EPS) by just 0.7% and 11.7% over the next two financial years. This implies that CSL is trading on forecast price-to-earnings multiples of 26.3 and 23.6 respectively.

In comparison, fellow health sector companies such as Ramsay Health Care (ASX: RHC) and Sonic Healthcare (ASX: SHL) are forecast to have double-digit growth rates in EPS for the next two years and yet both trade on lower multiples than CSL – in Sonic’s case, substantially lower.

Foolish takeaway

Without a crystal ball, it’s impossible to know how far the stock market might rally or how high CSL’s share price may go. However based on consensus forecasts for growth in earnings, a conservative judgement of CSL’s valuation today would likely lead conservative investors to seeing limited upside from current prices.

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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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