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The CSL Limited (ASX:CSL) share price is down 24% from its peak – is it time to buy?

The CSL Limited (ASX: CSL) share price is down 24% from its 52-week high of $232 per share and whilst the broader market has also suffered in recent weeks, it’s worth considering whether now is a good time to buy CSL shares.

The quality of CSL as a business is well known. It is one of the ASX’s premier biotechnology companies along with Mayne Pharma Group Ltd (ASX: MYX) and Clinuvel Pharmaceuticals Limited (ASX: CUV). It has also managed to grow revenues and profits consistently while continuing to serve a large market.

The challenge for investors who don’t already own CSL shares is that the market recognises that quality and reflects it in the share price. As such, the valuation of the company’s shares has always been quite high.

So, with the shares down 24% from their peak, is now a good time to buy CSL shares? Let’s look at a few metrics.

FY 2018 FY 2017
Revenue US$7,915 million US$6,947 million
Net Profit US$1,729 million US$1,337 million
Profit Margin 22% 19%
Market Cap A$80 billion (approx US$57 billion) Approx A$74 billion (US$52 billion) as at 30 June 2017
Price to Sales ratio 7.2 times 7.5 times
Price to Earnings ratio 33 times 39 times
Sales Growth rate (1 yr forecast) 9%
Underlying Profit Growth rate (1 yr forecast) 10% – 14%

*Source: CSL annual report and investor presentation

Interestingly, CSL’s profit margins are expanding which is why the company is expecting profit growth to be higher than sales growth.

CSL’s FY 18 dividend was US$1.51 per share, its current share price is A$177 (approx US$126) and I estimate a 12% expected annual return on CSL shares (equities as an asset class tend to average about 10% over time and I would expect CSL to perform better than average).

Given that information, I estimate that CSL is trading at an implied growth rate of 10% – 12%.

As such, I think CSL shares are fairly priced at the moment. I don’t think they are ridiculously cheap, and I also don’t think they are too expensive.

What now?

Since there is no margin for error in my back of the envelope calculations, I’m not jumping in to buy CSL shares right now. If the shares dip a little further, then I will definitely be tempted to open a position although I’m fully aware that this might not happen.

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Motley Fool contributor Kevin Gandiya has no position in any of the stocks mentioned.

You can find Kevin on Twitter @KevinGandiya.

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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