Market darling and healthcare giant CSL Limited (ASX: CSL) has seen its shares slide around 3% today and 20% over the last six months, despite the company's operating performance largely meeting guidance and market expectations.
What some investors consider to be the ASX's best company expects to grow underlying EBITDA a healthy 14% in FY17 with multiple new product lines in development and market-leading products in the lucrative healthcare space.
FX-adjusted earnings per share in FY16 were around $3.69, with analysts' expectations for US dollar earnings per shares of US$2.79 in FY17 the FX-adjusted Australian equivalent is $3.74. This is in line with the company's own guidance and suggest it trades on around 25x (estimated forward) earnings per share when selling for $92.40 today.
Given this company's potential to grow earnings at strong rates long into the future this may seem like good value and it could well be, however, there's one issue that is likely putting investors off.
Debt Outlook
Even though the headline numbers such as EPS growth look attractive at the same time the company's debt has been increasing, which is no surprise given it thrown US$500 million on a share buyback in FY17 on top of several large share buybacks over recent years.
Just in October the company issued US$500 million worth of new debt to US investors at a weighted average interest rate of 3% and average term to maturity of 12.5 years.
These terms are a reflection of the high credit quality of the business, but at the same time it's clear that management is partly using additional debt to fund the buyback party.
This may be good for bonus-chasing management teams desperate to drive metrics like earnings per share higher, although whether it is a prudent strategy for long-term shareholder returns is questionable.
Trying to reduce your cost of capital through debt funding makes sense to an extent, although it now has more than US$2.7 billion of US debt outstanding with total debt more than US$3.13 billion at the end of FY16.
The kicker is the changing post-US election macro-environment, because as debt yields rise there's a strong likelihood of widening credit spreads in the future if the group wants to refinance or restructure any of this debt.
Evidently some in the market are unimpressed, as is reflected in the steep share price falls and whether you believe the stock represents good value or not at these levels will partly come down to your views on the firm's ability to manage this debt pile if the credit curve lifts as widely expected.
Others to consider in the healthcare space include Cochlear Ltd (ASX: COH) or ResMed Inc. (CHESS) (ASX: RMD), although Cochlear is the most expensive on traditional metrics, I think its market position and outlook mean it could offer the best returns for investors prepared to take on more risk.
