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Is CSL (ASX:CSL) the best blue-chip share on the ASX?

Australia’s leading biotechnology company CSL Limited  (ASX:CSL) continues to demonstrate why it is one of the best large caps on the market after this month’s profit upgrade propelled the stock to a new record high.

The CSL share price is now up 42% over the last 12 months, significantly outperforming the 4% gain of the S&P/ASX 200  (Index: ^AXJO) (ASX: XJO).

A stronger second half

On May 18, CSL announced that it now expects net profit after tax for FY18 to be in the range of approximately US$1,680 million to US$1,710 million at constant currency. This was an 8% upgrade at the midpoint of the company’s previous full year guidance of US$1,550 million to US$1,600 million at constant currency announced in February.

For the 6 months ended 31 December 2017, CSL’s net profit after tax grew by 35% to US$1,086 million with earnings per share up 36% to $US2.40.

The company effectively guided for second half net profit after tax to be in the range of US$464 million to US$514 million. This month’s upgrade now forecasts second half net profit after tax in the range of US$594 million to US$624 million, which is a 25% upgrade at the midpoint.

CSL’s management attributed the profit upgrade to a number of factors including better-than-expected sales of Idelvion and Haegarda. A severe influenza season in the northern hemisphere has also seen a strong performance from the company’s Seqirus division.

CSL also noted that the timing of its research and development investments in some if its clinical trials will deliver a positive financial impact in FY18.

The market has reacted positively to the profit guidance upgrade and CSL’s share price is currently trading at a record high of $187.61 in morning trade. CSL is now the fourth-largest company on the Australian market after surpassing banking heavyweights National Australia Bank Ltd (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ).

Foolish takeaway

CSL rarely trades at a cheap valuation with the company currently trading for around 37x FY18’s earnings and 32x FY19’s estimated earnings.

The company’s impressive track record of high earnings growth justifies a premium valuation to the broader market. CSL’s substantial investment in a phase 3 clinical trial of CSL112 that will evaluate its efficacy and safety in treating patients that have suffered heart attacks could also drive earnings growth if successful.

The larger end of the Australian market is dominated by companies operating in the financial services, resources and retail sectors. Most of these companies are growing earnings at a slower rate than CSL and tend to be income-oriented stocks with high dividend payout ratios.

A high dividend payout ratio can indicate that a company is not reinvesting enough of its profits in future growth opportunities to expand the underlying business. The consistent growth of CSL’s underlying business and its commitment to research and development is why it stands out as one of the rare high growth large caps on the Australian market.

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Motley Fool contributor Tim Katavic owns shares of CSL Limited. The Motley Fool Australia owns shares of National Australia Bank Limited. 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 Scott Phillips.

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