At $90 billion: Is CSL Limited (ASX:CSL) overvalued?   

CSL Limited (ASX: CSL) is involved in the development, manufacturing and marketing of pharmaceutical and diagnostic products, and human plasma fractions. CSL is a market darling that has rewarded shareholders with 467% capital growth in the last decade. 

CSL recently broke through the $200 share price barrier, joining Cochlear Limited (ASX: COH) in this exclusive club.

The breakthrough was another instalment in an impressive 12 months, with CSL increasing from a 52-week low of $119.01. 

This share price performance is largely reflected in revenue growth for the company. In the 2008 financial year, CSL received $3.75 billion in revenue. Fast forward to the 2017 financial year and CSL increased this number to $8.99 billion. 

In that same time period, CSL grew earnings per share from $1.27 to $3.81 whilst increasing dividends paid per share from $0.46c to $2.03. Consequently, between 2008 and 2017, CSL has returned $24.60 in earnings per share whilst paying out $11.24 in dividends per share. 

As such, over the 10 years preceding 30 June 2017, CSL retained $13.36 in earnings per share. Concurrently, book value per share grew from $5.10 to $9.07 meaning that for every $1 retained by CSL, $0.30c was added to the balance sheet. 

With a market capital of $89.9 billion and a P/E ratio of 39, this negative return on retained earnings is alarming. Additionally, CSL has grown long-term debt on the balance sheet from $825.1 million in 2008 to $5 billion as at 30 June 2017. 

Attempting to explain this current negative return on retained earnings, in the 2017 financial year, CSL spent $645.3 million on research and development, while also splashing out $697 million on sales and marketing. 

As with every investment on the share market, if you trust management’s allocation of spending, CSL is a company earning money now and investing in earnings for the future. However, with a P/E ratio of 39, is CSL too expensive? 

At 30 June 2017 CSL was a company with $3.16 billion in equity producing $1.77 billion in operating profit. According to recent estimates, CSL is expected to turnover approximately $2.31 billion for the 2018 financial year. 

Simply speaking, how much are you willing to pay for a company that earns $2.31 billion in operating profit whilst investing significantly for the future? The market says $89.9 billion which is suggesting that CSL has plenty of room to grow. 

Foolish Takeaway

Despite my admiration of this company, I think the market is valuing CSL too high. Whilst return on retained earnings is negative, I’m inclined to believe management is investing for future returns. However, I’m happy to wait on the side lines until these returns are realised. 

Top 3 ASX Blue Chips To Buy In 2018

For many, blue chip stocks mean stability, profitability and regular dividends, often fully franked..

But knowing which blue chips to buy, and when, can be fraught with danger.

The Motley Fool’s in-house analyst team has poured over thousands of hours worth of proprietary research to bring you the names of "The Motley Fool’s Top 3 Blue Chip Stocks for 2018."

Each one pays a fully franked dividend. Each one has not only grown its profits, but has also grown its dividend. One increased it by a whopping 33%, while another trades on a grossed up (fully franked) dividend yield of almost 7%.

The names of these Top 3 ASX Blue Chips are included in this specially prepared free report. But you will have to hurry. Depending on demand – and how quickly the share prices of these companies moves – we may be forced to remove this report.

Click here to claim your free report.

Motley Fool contributor Matt Breen has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Cochlear Ltd. 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.

The 5 mining stocks we’re recommending in 2019…

For decades, Australian mining companies have minted money for individual investors like you and me. But if you believe the pundits and talking heads on TV, those days are long gone. Finito! Behind us forever…

We say nothing could be further from the truth. To earn the really massive returns, you’ve got to fish where others aren’t fishing—and the mining sector could be primed for a resurgence. That’s why top Motley Fool analysts just revealed their exciting new research on 5 ASX miners they believe could help you profit in 2019 and beyond…


The best way we see to play the global zinc shortage… Our #1 favourite large-cap miner (hint: it’s not BHP)… one early-stage gold miner we think could hit the motherlode… Plus two more surprising companies you probably haven’t heard of yet!

For free access to our brand-new research, simply click here or the link below. But be warned, this research is available free for a limited time only, and we reserve the right to withdraw it at any time.

Click here for your FREE report!