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Top broker slaps buy ratings on CSL Limited (ASX:CSL) and ResMed Inc (ASX:RMD) shares

The shares of CSL Limited (ASX: CSL) and ResMed Inc (ASX: RMD) could be on the move on Monday after they were the subject of a positive broker note out of Goldman Sachs.

According to the note, the broker has initiated coverage on both healthcare companies with buy ratings.

Here’s why Goldman is bullish on CSL and ResMed.

CSL Limited.

Goldman has placed a price target of $231.00 on the shares of CSL Limited. This implies potential upside of approximately 20% for the biotherapeutics company’s shares over the next 12 months.

Its analysts have made the move on the belief that premium returns and growth profiles warrant premium valuations.

It has stated that: “We believe CSL offers the most attractive risk-reward in ASX Healthcare. Its current portfolio includes market-leading products across a series of treatable conditions for which diagnosis is improving and pricing is relatively stable.” I would have to agree with this view.

Furthermore, although CSL’s shares trade at a premium already to the market average, the broker believes its growth profile means this can widen further. Goldman has suggested a lofty forward EV/EBITDA multiple of 27.6x is fair.

ResMed.

Its analysts have placed a price target of $16.70 on ResMed’s shares. As with CSL, it believes its growth profile warrants a premium valuation. This price target implies potential upside of over 18% over the next 12 months.

Goldman has suggested that ResMed is well placed to capture the upside from increasing diagnosis of a growing addressable market. This should lead to sales growing by 8.8% per annum through to FY 2021.

Furthermore, the expansion of payor coverage in key markets is expected to lead to the uptake of remote monitoring technology which ResMed specialises in. This should drive margin-accretive growth through the mid-term.

The broker believes it is a superior option to industry peer Fisher & Paykel Healthcare Corp Ltd (ASX: FPH), which it has a neutral rating on. Its analysts believe that it will be challenging for its rival to sustain its stellar top-line momentum.

Should you invest?

I would have to agree with Goldman and believe both CSL and ResMed are the two standout picks in the healthcare sector right now despite their premium valuations.

However, while I would certainly snap up CSL’s shares today, I’m going to hold fire on ResMed for the moment.

As I mentioned here on Friday, recent data out of the U.S. showed that Medicare made overpayments of almost US$631.3 million for replacement positive airways pressure device supply claims that did not meet Medicare requirements. Analysts at Macquarie believe this demonstrates an element of resupply that is not reasonable or necessary and may not be repeated in the future.

As Goldman did not address this development, I intend to hold fire until more is known. After all, this could potentially mean ResMed falls short of the broker’s sales forecasts.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended ResMed Inc. 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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