Australia’s largest biotechnology company CSL Limited (ASX: CSL) has continued its impressive run over the last 2 months following May’s profit upgrade for FY18.
CSL’s share price hit a record high of $204.67 on July 13 before retreating, and is currently up 58% over the last 12 months, comfortably outperforming the 9% gain of the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
The stellar run has seen CSL surpass banking giants National Australia Bank Ltd. (ASX: NAB) and Australia and New Zealand Banking Group (ASX: ANZ) to become Australia’s 4th largest company with a market capitalization of $91 billion.
Should investors buy CSL now for fear of missing out, or, should they wait for a more attractive valuation?
In May, CSL upgraded its guidance for FY18 by 8% at the midpoint with the company now forecasting FY18 net profit after tax to be in the range of approximately US$1,680 million to US$1,710 million at constant currency. Management attributed the higher forecast to better than expected sales from Idelvion and Haegarda, a strong performance from Seqirus due to the severe northern hemisphere influenza season and a positive financial impact from the timing of R&D expenditure from some of CSL’s clinical trials.
At the close of Monday’s trade, the consensus estimate per Reuters for CSL’s FY19 earnings is US$4.34(A$5.84) per share. This results in a forward valuation multiple of 34, which is a significant premium to the general market’s valuation multiple.
However, CSL’s impressive track record of substantial earnings growth over the last 2 decades in conjunction with the various tailwinds the business is expected to benefit from over the next few years justifies a premium valuation to the broader market. Investors will have to weigh whether the premium that the market is currently pricing into CSL’s share price is commensurate with the company’s future growth prospects.
At 34 times forward earnings, CSL is trading at a cheaper valuation than fellow large-cap healthcare star Cochlear Limited (ASX: COH). Cochlear is currently trading at 41 times forward earnings despite both companies being projected to grow earnings by roughly 15% in FY19.
Following CSL’s bullish run over the last 12 months, some caution from investors is probably warranted as we head into reporting season even though the company’s long-term bullish thesis remains intact. CSL will report its annual earnings on August 15 and is expected to be in line with May’s guidance. The main focus will be on the company’s outlook for FY19 to determine whether the bullish expectations priced into its share price are justified.
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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. 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.