The Motley Fool

Is CSL Limited worth $78?

The Australian Financial Review (AFR) has reported that Deutsche Bank has maintained its “buy” recommendation on CSL Limited (ASX: CSL) and raised its price target from $71 to $78. With the stock last trading at $70.87 this would provide 10% upside to Deutsche’s target.

CSL is undoubtedly a high-quality blue chip company which is appealing to many investors. With facilities in Australia, Germany, Switzerland and the USA and products spanning plasma, vaccines and pharmaceuticals, CSL provides diversity by region, product, client and customer.

From the point-of-view of high-quality healthcare stocks which offer a globally diversified stream of earnings, CSL sits alongside Sonic Healthcare Limited (ASX: SHL), Ramsay Health Care Limited (ASX: RHC) and ResMed Inc (ASX: RMD).

The dilemma faced by investors in these global health sector stocks is not so much one of judging quality but rather growth. These stocks should all continue to grow their earnings, however competition is always present and the speed of growth does have a bearing on their respective valuations.

Each of these stocks appears to be reasonably highly priced – a resulting factor of a premium for quality but also a premium for implied high growth rates. This makes accurately forecasting the growth rates vitality important to justify paying the premium.

According to Morningstar Research, earnings per share in the current financial year (FY) 2014 will be relatively flat on the previous year for CSL, however earnings are set to jump by around 12% in FY 2015, to 294.7 cents per share. This equates to a FY 2015 price-to-earnings (PE) ratio of 24. Conversely at $78, the implied PE ratio increases to 26.5.

Foolish takeaway

Over the past five years CSL has been priced on multiples closer to the low rather than the mid-to-high twenties. Investors buying CSL at today’s prices would want to have a high level of confidence that strong growth rates in earnings are set to reappear in the near future.

The top ASX pick you’ve never heard of…

Top Motley Fool analysts just identified their #1 ASX pick for 2014, a small-cap stock that could be poised for big gains (and offers a fat, fully franked dividend!). Discover all the details now, including the name and code, in this FREE investment report, "The Motley Fool’s Top Stock for 2014."

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

NEW. Five Cheap and Good Stocks to Buy in 2019…

Our Motley Fool experts have just released a brand new FREE report, detailing 5 dirt cheap shares that you can buy today.

One stock is an Australian internet darling with a rock solid reputation and an exciting new business line that promises years (or even decades) of growth… while trading at an ultra-low price…

Another is a diversified conglomerate trading near a 52-week low all while offering a 2.8% fully franked yield…

Plus 3 more cheap bets that could position you to profit over the next 12 months!

See for yourself now. Simply click the link below to scoop up your FREE copy and discover all 5 shares. But you will want to hurry – this free report is available for a brief time only.