Better Buy: Cochlear Limited (ASX:COH) vs. CSL Limited (ASX:CSL)

Healthcare companies Cochlear Limited (ASX: COH) and CSL Limited (ASX: CSL) have been 2 of the market’s most rewarding shares for long-term investors. However, even some of the best businesses on the Australian share market are not immune to the bearishness that has impacted global equity markets over the last several weeks.

The recent sell-off has seen the share prices of Cochlear and CSL drop by as much as 23% and 25% respectively from their record highs in early September, and presents investors with a more reasonable entry point into some of the best businesses on the Australian share market.

A buying opportunity? 

In FY18, Cochlear grew sales revenue by 9% to $1.35 billion with net profit after tax increasing by 10% to $245.8 million. At its AGM last month, Cochlear reaffirmed its guidance for FY19 net profit after tax to be within the range of $265 million to $275 million. This would represent growth of between 8-12% over FY18. The company should benefit from the lower Australian dollar that is currently trading for around 72 cents as the guidance provided by the company was forecast with a weighted average AUD/USD exchange rate of 75 cents.

This morning’s news of Cochlear losing a patent infringement case which the company intends to appeal has seen the share price fall to $175. This prices Cochlear at a forward valuation multiple of around 37 at the midpoint of the company’s FY19 guidance.

CSL saw sales revenue increase 15% to US$7.59 billion and net profit after tax rise 29% to US$1.73 billion in FY18. The main catalyst for the significant growth in earnings came from CSL Behring after strong contributions from Privigen and Hizentra in immunoglobulins and Haegarda in specialty products.

CSL also reaffirmed its guidance for FY19 earnings at its AGM last month. The company has guided for net profit after tax in FY19 to be in the range of US$1,880 million to US$1,950 million at constant currency and would represent growth of 10-14% over FY18. CSL is currently trading for $189, which prices the company on a forward valuation multiple of around 32 at the midpoint of guidance.

Foolish takeaway

While Cochlear and CSL are both great Australian companies neither of them are trading at prices that could be deemed conventionally cheap. Interested buyers are going to have to pay a premium to acquire either and I think CSL represents the better value between the 2 companies from a valuation perspective.

CSL has grown at a faster rate than Cochlear over the last several years and trades at a lower valuation multiple based on a number of valuation metrics such as price to trailing earnings and price to cash flow. Furthermore, and perhaps more importantly as markets are forward looking, is that CSL’s forward valuation multiple is lower than Cochlear’s despite expectations of higher growth in FY19.

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Motley Fool contributor Tim Katavic owns shares of CSL 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.

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