The CSL Limited (ASX: CSL) share price is near a record high of $242.10 this morning after a number of bullish notes out of popular sell side research desks including Goldman Sachs, Morgan Stanley and Credit Suisse.
The latest round of upgrades to price targets is on the back of brokers' data points suggesting strong demand for CSL's core immunoglobulin products used to treat patients by healthcare providers globally.
Credit Suisse and Goldmans have a $249 share price target on CSL, with Goldman's noting the healthcare giant is guiding for FY 2020 earnings growth of 13%-17% on sales growth around 13% if you back out the one-off hit associated with the change in Chinese albumin distribution.
Over the medium term this change should actually help boost CSL's sales and margins in a fast-growing Chinese market.
Overall, Goldman's is forecasting 12% earnings per share growth through to FY 2022 to reach its $249 12-month share price target today.
The caveats being that CSL is already richly valued with it trading on 30x Goldman's estimates of FY 2021's earnings per share, or at 24x its forecast for FY 2020's EBITDA at $249 per share.
For investors worried that CSL shares are already up 33% in 2019 alone, there are a few points to keep in mind.
As Goldmans and other brokers acknowledge CSL is a blue-chip delivering consistent double-digit organic growth mainly thanks to the strong underlying demand for its core immunoglobulin products.
This suggests it has a strong market position and a surprisingly common investing mistake is to underestimate how long these kind of strong underlying growth trends can continue.
Consider that CSL is largely servicing public healthcare sector demand where there's unlimited and unending public pressure for more spending on public health services.
Another point to note on 'broker valuations' on these type of growth businesses is that the common "sum of the parts" methodology of the present value of future cash flows is directly dependent on the discount rate used.
As global interest rates fall discount rates are being lowered to boost the 'sum of the parts' valuations.
Genuine blue-chip growth businesses like CSL are likely to enjoy fruitier valuations from analysts today if the growth they offer continues to become more valuable in a world where other risk-on or risk-off investment returns become increasingly feeble.
Another point to note, but not easy to quantify for even Australia's leading healthcare analysts is that CSL is growing free cash flow at double-digit rates while reinvesting heavily back into the business to research and develop new products.
The likelihood of new products such as the much vaunted CSL 112 contributing to free cash flow in the years ahead is hard to quantify in terms of future cash flows, but the point is CSL is able to invest heavily and grow profits at the same time.
Finally, CSL also offers exposure away from the soft domestic economy and provides leverage to any further weakness in the Australian dollar. This as cash rate futures traders bet on another rate cut and chatter turns to the prospect of unorthodox central bank stimulus for the local economy.
Of course CSL like other leading healthcare businesses including Cochlear Ltd (ASX: COH) and ResMed Inc. (ASX: RMD) carries plenty of risk to the downside given the fruity valuations and ever present risk of cut-price competition in particular. As such any holding should only be a small part of a balanced investment portfolio.
