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Why UBS thinks this is the time to buy CSL Limited (ASX:CSL) shares

The sell-off of this market darling may be over with CSL Limited’s (ASX: CSL) share price enjoying its second consecutive day of gains as UBS upgrades the stock to “buy” from “neutral”.

The stock is outperforming the flat S&P/ASX 200 (Index:^AXJO) (ASX: XJO) index this morning as it is rallying 0.9% higher to $192.67 but is still down 16% from its September peak.

It’s not the only healthcare stock that’s running ahead at the time of writing though. The Cochlear Limited (ASX: COH) share price and RESMED/IDR UNRESTR (ASX: RMD) share price are also making big gains, although CSL is the only one in the sector scoring an upgrade from UBS.

Why the upgrade?

The broker made the recommendation upgrade after reviewing the latest results from CSL’s competitors Shire and Grifols Bioscience.

It believes that CSL’s immunoglobulin (IG) portfolio continues to grow faster than the rest of the market and that the company can generate a compound annual growth rate (CAGR) of around 11% over the next three years.

That means its forecast price-earnings (P/E) multiple of around 30 times isn’t unwarranted even though that’s nearly double the P/E of the S&P/ASX 200.

However, the broker has lowered its earnings per share (EPS) forecast on the stock by around 6% due in part to changes in its exchange rate assumptions, and that has resulted in a drop in its price target for CSL to $220 from $232 per share.

That still leaves plenty of upside for the stock, which had crashed to a six-month low of $174.69 just two weeks ago as high P/E stocks took the brunt of the October market sell-off.

“CSL is trading on a 12-mth forward PE of 30.2x, a 97% premium to the ASX200, compared to 2-year averages of 29.7x and 87% respectively,” said UBS.

“On a PE vs 2-year forward EPS growth basis, it screens favourably relative to a basket of listed Australian healthcare companies. Our DCF-based valuation of A$220 is arguably a better reflection of inherent value noting sustained EPS growth forecasts over the longer term.”

There’s plenty to like about CSL given its strong track record in generating shareholder returns. I rate this as one of the most admired stocks on the market along with Macquarie Group Ltd (ASX: MQG).

Foolish Takeaway

While I think CSL has probably seen the bottom in this cycle, I am more inclined to buy value stocks in anticipation of the next market upswing as we approach the end of the calendar year.

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Motley Fool contributor Brendon Lau owns shares of Macquarie Group Limited. The Motley Fool Australia has recommended Cochlear Ltd. and ResMed Inc. 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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