How much higher can Cochlear Limited and CSL Limited shares go?

Cochlear Limited (ASX:COH) and CSL Limited (ASX:CSL) continue to surge higher.

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Healthcare is regarded as a defensive industry, given demand for its services are relatively inelastic. This is because people will continue to use health services irrespective of the economic cycle. Accordingly, the S&P/ASX 200 Health Care Index (ASX: XHJ) has benefited dramatically with the index up over 10% since the start of this year. These returns easily trump the S&P/ASX 200 Index (ASX: XJO), which is only up 2.5% since the start of the year.

A contributor to the success of the Health Care Index has been the stellar rise of its two biggest exponents; Cochlear Limited (ASX: COH) and CSL Limited (ASX: CSL), both of which are up 25% and 10% respectively since the start of the year.

However, given their current prices, it's time to consider whether there is much value left in these healthcare blue chips.

Cochlear Limited

Cochlear is the gold standard in cochlear implants. The company pioneered bionic hearing devices in the early 1980's under the guidance of Dr Graeme Clark and has gone from strength-to-strength as one of Australia's most innovative biotechnology companies.

Cochlear's legacy has stood the test of time despite a number of product recalls in 2013, fears of cheaper hearing implants from China and intense competition from number two implant brand Advanced Bionics (owned by Swiss medical product giant Sonova).

It is currently the brand of choice for hearing aids and accounts for approximately two-thirds of all hearing implants installed in patients worldwide.

Relevantly, sales benefit from this demand. The company reported a 32% increase to headline sales revenue in the first-half of 2016. The uplift in sales was driven by foreign exchange gains, given the stronger U.S. dollar. As current forecasts indicate a continuing depreciation of the Australian dollar, Cochlear should stand to benefit from this trend.

CSL Limited

CSL is a global leader in blood plasma, immunoglobulin and vaccine products, effectively having a duopoly over most of its offerings with American healthcare giant, Baxter International Inc. To CSL's credit, however, it has not rested on its laurels. CSL has been active in acquisitions, such as last year's purchase of Novartis AG's influenza vaccine business to strengthen its stranglehold over the flu vaccine market.

Although I have always regarded CSL as "expensive", the company continues to surprise. In its first half of 2016, earnings per share grew 9% and underlying net profit after tax (NPAT) came in 7% higher compared to the prior corresponding period.

I believe this growth is likely to continue, especially given favourable tailwinds from a stronger U.S. dollar (as results will be higher when translated to Australian dollars).

Foolish takeaway

Australian investors are fortunate with the array of stocks exposed to healthcare available to them on the ASX. Whilst any diversified portfolio should consist of stocks from all sectors, investors may wish to wait for a better entry point before purchasing Cochlear and CSL, given their premium valuations.

Whilst I wouldn't be surprised to see both stocks head higher this year, I believe investors should wait for a pullback in share price before adding these two solid stocks to their portfolio.

Motley Fool contributor Rachit Dudhwala has no position in any stocks mentioned. 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.

More on ⏸️ Investing

Close up of baby looking puzzled
Retail Shares

What has happened to the Baby Bunting (ASX:BBN) share price this year?

It's been a volatile year so far for the Aussie nursery retailer. We take a closer look

Read more »

woman holds sign saying 'we need change' at climate change protest
ETFs

3 ASX ETFs that invest in companies fighting climate change

If you want to shift some of your investments into more ethical companies, exchange-traded funds can offer a good option

Read more »

a jewellery store attendant stands at a cabinet displaying opulent necklaces and earrings featuring diamonds and precious stones.
⏸️ Investing

The Michael Hill (ASX: MHJ) share price poised for growth

Investors will be keeping an eye on the Michael Hill International Limited (ASX: MHJ) share price today. The keen interest…

Read more »

ASX shares buy unstoppable asx share price represented by man in superman cape pointing skyward
⏸️ Investing

The Atomos (ASX:AMS) share price is up 15% in a week

The Atomos (ASX: AMS) share price has surged 15% this week. Let's look at what's ahead as the company build…

Read more »

Two people in suits arm wrestle on a black and white chess board.
Retail Shares

How does the Temple & Webster (ASX:TPW) share price stack up against Nick Scali (ASX:NCK)?

How does the Temple & Webster (ASX: TPW) share price stack up against rival furniture retailer Nick Scali Limited (ASX:…

Read more »

A medical researcher works on a bichip, indicating share price movement in ASX tech companies
Healthcare Shares

The Aroa (ASX:ARX) share price has surged 60% since its IPO

The Aroa (ASX:ARX) share price has surged 60% since the Polynovo (ASX: PNV) competitor listed on the ASX in July.…

Read more »

asx investor daydreaming about US shares
⏸️ How to Invest

How to buy US shares from Australia right now

If you have been wondering how to buy US shares from Australia to gain exposure from the highly topical market,…

Read more »

⏸️ Investing

Why Fox (NASDAQ:FOX) might hurt News Corp (ASX:NWS) shareholders

News Corporation (ASX: NWS) might be facing some existential threats from its American cousins over the riots on 6 January

Read more »