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Is the CSL Limited (ASX:CSL) share price a buy?

The CSL Limited (ASX: CSL) share price has been one of the best blue-chip performers on the ASX over the past year, five years and ten years. Indeed, since coming onto the ASX CSL has been a great investment.

With CSL being up around 48% since this time last year, it’s worth questioning whether it is now too expensive to consider being a buy.

CSL has been generating very impressive profit growth. However an increase in the price/earnings ratio, or how much people are willing to pay for a dollar of earnings, has increased as well. It’s now trading at around 40x FY18’s estimated earnings. This is a hefty price.

No business is worth a buy at any price. I think it was short-sighted to think that interest rates would stay at 0% around the world for a long time. It may also be foolish (with a little f) to believe that high price/earnings ratios will stay as high as they are for CSL and other high-quality growth shares.

Don’t get me wrong, CSL is a wonderful company. There are several good reasons why its profit has done well and why it likely will continue to grow profit nicely.

Healthcare is, on average, my favourite industry. It offers defensive earnings and growing earnings due to the ageing populations across many western countries.

CSL in-particular is benefiting because it keeps releasing new products which open new revenue streams for the business. The products take years to research and develop, therefore CSL is constantly investing for growth.

It’s a powerful combination when you can find a business that is retaining significant amounts of profit to re-invest and it earns excellent returns on that retained profit. In the half-year to 31 December 2017 the company spent US$342.9 million on research and development expenses.

Australian CSL shareholders are also benefiting from the weakening Australian Dollar compared to the US Dollar. Some economists believe the Aussie Dollar may drift towards $0.70.

Foolish takeaway

CSL is currently trading at 34x FY19’s earnings and 30x FY20’s earnings. If you are investing with the next 12 months in mind then CSL is definitely not good value today. However, over the time frame of a decade CSL may continue to be a big winner despite the high valuation. I’m personally leaving it on the watchlist for now.

Instead, I’d rather put my money towards one of these top growth shares which are trading at much better value.

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Motley Fool contributor Tristan Harrison has no position in any of the 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 Scott Phillips.

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