Is the CSL Limited share price too expensive?

CSL Limited (ASX: CSL) has seen its share price climb close to 24% in the past 12 months and a whopping 630% over the past decade to trade at around $98.64 currently.

If the company hadn’t split it shares into three back in 2007, we’d probably be talking about a share price of $294 now.

But just because CSL’s share price is approaching $100 (for the second time), doesn’t mean the company will again split the shares, and it also doesn’t mean it’s necessarily expensive.

That’s an important point.

A $100 share price may mean investors are buying shares cheaper than if they were $30, $5 or 10 cents. What is relative is the earnings per share (EPS) that the company produces. CSL reported EPS of US$2.92 last financial year, the equivalent of A$3.75, according to Commsec. That puts the company on a P/E ratio of around 26.3x.

In contrast, Domino’s Pizza Enterprises Ltd. (ASX: DMP) has a share price half that of CSL at $49.01, but analyst forecasts of earnings per share of 92.5 cents mean Domino’s has a much higher P/E ratio of 53x earnings. That suggests Domino’s shares are more expensive, with investors expecting very strong growth in earnings this financial year.

Blood plasma group CSL, on the other hand, is expecting slower growth this financial year, with revenues expected to grow by around 2% and net profit after tax by around 5%. Combine that with an on-market buyback of up to $950 million worth of the company’s shares, and EPS should grow at a higher rate than net profit.

If we assume 7% EPS growth, CSL will likely report earnings of US$3.12 (A$4.34) in the 2016 financial year, equating to a P/E ratio of around 23x.

That doesn’t appear expensive compared to CSL’s long-term historical P/E ratio of above 35x, but we do have to factor in lower growth in the years ahead. No company can continue generating double-digit growth in earnings forever.

But there’s no doubt that CSL is one of the ASX’s highest-quality companies, generating consistently high returns on equity – 47% last financial year. That comes from great management, reinvesting profits back into research & development rather than paying most of it out in dividends, and an ever-increasing product range.

CSL has always been viewed as a company with an expensive price tag, but investors are paying for quality, and CSL has delivered in spades since listing on the ASX. According to CapitalIQ data, CSL has returned 12,246% (with dividends reinvested) since June 1994.

Only two companies on the ASX have generated higher returns since 1992 (CapitalIQ data only goes back that far), ARB Corporation Ltd (ASX: ARB) and Sonic Healthcare Limited (ASX: SHL) with 13,827% and 20,110% respectively.

Foolish takeaway

Don’t get carried away with a share price of $100 for CSL’s shares. Price is relative to earnings, and at current prices, CSL may be worth a look.

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Motley Fool writer/analyst Mike King owns shares in CSL. You can follow Mike on Twitter @TMFKinga

Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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