Could one of our best loved blue-chip stocks be at risk of a sell-off next week even as it delivers a strong full year result?
The stock in question is blood products group CSL Limited (ASX: CSL), which is expected to announce FY18 profits next Wednesday.
While robust growth is a given as management has provided guidance with the market expecting around a 30% increase in net profit to $1.7 billion, the risk is around its FY19 outlook.
Some brokers like Morgan Stanley think there's too much good news factored into the current share price with the stock adding another 0.6% this morning to $201.84. This takes CSL's rally to 44% since the start of this calendar year, while the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is barely up 4%.
"CSL's P/E has expanded to ~33x 1-yr Factset EPS vs long-term average of ~22x on the back of an ~8% NPAT upgrade for FY18 (provided May 2018)," said Morgan Stanley.
"While we expect a solid FY18 result, this is well known by the market. We think CSL's FY19 outlook may be ~5% below Street [consensus] expectations for NPAT [net profit after tax] which ignore rising raw material costs."
The potential for CSL to disappoint on its outlook is the key reason why the broker believes there is a 60% to 70% chance that the stock will fall over the next 30 days.
It is difficult to justify buying the stock at these lofty levels even though most brokers on Reuters rate it a "buy" (Morgan Stanley has an "equal-weight" recommendation on CSL).
The problem is that the average broker price target stands at $145.70. But there's a reason why investors are not paying any heed to this right now.
Firstly, brokers won't revise their valuation on the stock this close to its results. They will wait to look under the hood next week before adjusting their forecasts and rolling-forward their model.
The roll-forward, where analysts remove FY18 from their forecasts, will almost certainly lead to an increase in the price target for the stock. This is because future earnings for CSL are higher than FY18.
Secondly, CSL has been such a great success story that most investors will hang on to it regardless of valuation.
However, the increased price targets from the roll-forward probably could still fall short, particularly if the outlook is not as bullish as what the market is expecting.
Also, investors who ignore valuation won't be able to optimise their returns, particularly if our late-stage bull market turns.
On the other hand, not all experts will be worried about a soft outlook from management. After all, CSL has a history of being more conservative on guidance than consensus.
This may just be enough to save the stock from a sharp sell-off.
CSL isn't the only high-flying market darling in the medical sector. Stocks like Cochlear Limited (ASX: COH) and RESMED/IDR UNRESTR (ASX: RMD) – better known as ResMed – are also trying to shake-off similar concerns.
There's another outperforming medical-related stock that the experts at the Motley Fool believe will keep running ahead too.
This stock has outperformed the market, just like CSL, but its growth momentum is unlikely to slow, according to our experts.
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