5 reasons CSL Limited & Cochlear Limited keep thumping the market

While the tech sector on the ASX might not have anything to come close to US giants like Google, Apple, or Amazon, it does have some world-leading healthcare businesses. In the sleep apnea treatment space is ResMed Inc. (CHESS) (ASX: RMD), while Cochlear Limited (ASX: COH) and CSL Limited (ASX: CSL) are also global leaders in their respective fields.

Long-term oriented growth investors then would do well to make sure a reasonable part of their portfolio has exposure to some blue-chip healthcare shares as they enjoy tailwinds in the form of ageing populations and government spending.

This week Cochlear and CSL have hit record valuations in part because they’re exposed to a weaker Australian dollar as both earn the vast majority of their revenues abroad as global healthcare leaders.

However, irrespective of currency movements both should remain near the top of long term growth-oriented investors watch lists for multiple reasons, including the below.

1)   Market leaders – In the healthcare space being a market leader allows you to charge premium prices for your products

2)   Demand – products have an almost inexhaustible demand thanks to the unrelenting pressure on national governments worldwide to increase their healthcare budgets

3)   Margins – the demand and market-leading status combine to protect or increase profit margins with little push back as patients demand the best products

4)   Tailwinds – the healthcare sector has some powerful tailwinds thanks to the ageing population and developing economies like China starting to ramp up healthcare spending

5)   Earnings growth – It’s not rocket science. Share prices follow earnings at the end of the day and all of the above factors mean these healthcare giants are able to consistently grow earnings at double-digit rates over the long term.

Of course no share is a buy at any price and it’s true that both CSL and Cochlear currently trade at lofty multiples of expected earnings.

CSL currently sells for $111.30 on around 28x analysts’ estimates for $3.91 in earnings per share for the full 2016 financial year.

Cochlear currently sells for $113.70 on around 33x analysts’ estimates for $3.37 in earnings per share for the full 2016 financial year. Given its outlook for superior growth rates, I would prefer Cochlear on current valuations.

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Motley Fool contributor Tom Richardson owns shares of ResMed Inc..

You can find Tom on Twitter @tommyr345

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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