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Will CSL Limited return to $120 per share?

Credit: Pictures of Money

CSL Limited’s (ASX: CSL) share price has risen by 6% in the last week. That’s ahead of healthcare peers Ramsay Health Care Limited (ASX: RHC) and Cochlear Limited (ASX: COH). They are up 2% each. CSL’s share price gain follows a decline in July and August. This was caused by the company missing earnings forecasts. However, in my view it has long term potential and could reach its recent high of $120 per share over the medium term.

Hizentra

Investors in CSL may be nervous about the company’s prospects. That’s because CSL’s global plasma peer Shire received FDA approval this month for Cuvitru. This will compete directly with CSL’s Hizentra drug for replacement therapy for primary immune deficiency (PID) in adult and paediatric patients aged over two years old. Although Cuvitru will be a competitor to Hizentra, the outlook for demand growth is positive. In the US this should offset the impact of the new entrant Cuvitru. This means that Hizentra should continue to act as a positive catalyst on CSL’s profitability.

Seqirus

CSL has a sound track record of process improvements. This will help it to turn around its influenza vaccine division, Seqirus. It is forecast to grow sales from US$652 million in financial year 2016 to US$1 billion by 2020. In the near term, Seqirus is expected to break even by 2018. In the longer term, I feel it has bright growth prospects thanks to an increasing world population and consistent demand for influenza vaccines.

For example, between 5% and 20% of the US population gets flu each year, with 200,000 of them hospitalised. World population growth of 34% is forecast between now and 2050. This should provide a growing market for influenza vaccines. CSL is cost-competitive and has a large manufacturing scale which should mean that Seqirus becomes increasingly dominant within the influenza vaccine industry.

Finances

CSL’s balance sheet and profitability indicate that further acquisitions are affordable. Its net debt to equity ratio of 101% could increase and debt levels would still be affordable. That’s because CSL’s operating profit covered interest payments 20.3 times in financial year 2016. Free cash flow of US$683 million shows that capital expenditure has scope to increase in order to invest in the turnaround of Seqirus and in further product innovation.

Outlook

CSL has a P/E ratio of 32.7. Although this is higher than the ASX’s P/E of 17.5, healthcare peers Ramsay and Cochlear have P/Es of 34.6 and 41.1 respectively.

Further, CSL’s EPS is forecast to increase by 28.4% per annum during the next two years. When combined with its long term growth potential, I feel this means that CSL merits a higher valuation. Therefore, a return to $120 per share seems likely in my opinion. CSL could help to boost your portfolio, just as this investor was able to do with $10,600 which grew into $8 million.

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Motley Fool contributor Robert Stephens 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.

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