MENU

Are CSL Limited shares cheap today?

Shares in healthcare giant CSL Limited (ASX: CSL) continued to fall on Wednesday, bringing the total slump in share price to almost 13% since it reported full-year results on August 17. This is in stark contrast to peers Cochlear Limited (ASX: COH) and Sirtex Medical Limited (ASX: SRX) which both surged over 10% after reporting (albeit the latter has given up some of its gains in recent weeks).

Accordingly, with CSL’s share price trading at a touch over $100, I thought it was time to revisit this S&P/ASX 20 Index (ASX: XTL) stalwart to see if its current price makes it a buy today.

CSL’s results

On the face of it, CSL’s results appeared robust. Management reported underlying revenue for the full year was up 8% in constant currency with underlying net profit after tax (NPAT) growing 5% (in constant currency) to $1.24 billion. (Not a bad result for a company with a market capitalisation of $47 billion odd, I must say!).

Nevertheless, the market was seemingly disappointed given CSL’s statutory NPAT was down 11% on prior year (in constant currency). The sour grape in CSL’s results was the performance of its newly acquired influenza vaccines business – Seqirus. Seqirus was acquired from Novartis AG on 31 July 2015 and disappointed with the business unit reporting sales of only US$652 million due to a weaker influenza season.

Although Seqirus’ poor performance contributed a loss to the broader business, dragging group NPAT lower, I believe CSL’s share price demise stems from overzealous market expectations, rather than poor results per se. This is arguably because of its high price-earnings multiple of 29x (after the 13% crash to share price).

Outlook

With the market setting such high expectations for CSL, any missed expectations are punished. Despite this, CSL’s investment thesis remains intact in my books.

In its full year results, management reassured investors that group NPAT is expected to grow 11% in constant currency for the 2017 year, with earnings per share outstripping profit growth.

If earnings (EBITDA) grow by 14% next year (as guided by the CEO), CSL currently trades on a forward price-earnings of about 25x by my calculations. This makes it cheap by historical standards and worth a second look in my opinion.

Foolish takeaway

CSL is a global leader in blood plasma, immunoglobulin and vaccine products making it immune (pun intended) to economic cycles. Global demand for CSL’s life-saving products makes it a solid defensive stock with unrivaled growth potential.

Although it continues to demand high price-earnings multiples, I believe the recent pullback in share price alongside its growth outlook justifies a purchase at present time.

Therefore, given the price slump, I reverse my earlier recommendation and rate CSL a buy today.

Here's what happened to The Motley Fool's massive $1 million ASX bet...

Less than three years ago, Motley Fool boss Bruce Jackson bet $1,000,000 of company money (plus $500,000 of his own family's cash) on one unique service known as Motley Fool Pro. Now Pro is up a staggering 89%, darn near DOUBLING members' money! Simply click the link below to get a sneak peek at Pro's 3 biggest winners... the "golden egg" stocks that have powered Pro to 89% returns! Fair warning: Your special time-limited invitation won't wait.

Discover the 3 "golden egg" stocks - and your invitation!

 

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.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss a very important event! Chief Investment Advisor Scott Phillips and his team at Motley Fool Share Advisor are about to reveal their latest official stock recommendation. The premium “buy alert” will be unveiled to members and you can be among the first to act on the tip.

Don’t let this opportunity pass you by – this is your chance to get in early!

Simply enter your email now to find out how you can get instant access.

By clicking this button, you agree to our Terms of Service and Privacy Policy. We will use your email address only to keep you informed about updates to our website and about other products and services we think might interest you. You can unsubscribe from Take Stock at anytime. Please refer to our Financial Services Guide (FSG) for more information.