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.

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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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