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When should you stop buying CSL shares?

The CSL Limited (ASX: CSL) share price hit a new all-time high this morning (again). CSL shares opened trading today at $261.45 but quickly shot up to the new high watermark of $263.18 soon afterwards. The CSL share price has now settled somewhat and shares are going for $258.81 (at the time of writing).

This writer for one has lost count of the times ‘CSL hits new high’ has had to be typed this year. After starting off 2019 at $185.38 per share, today’s high means CSL has now delivered an eye-watering 42% return for the year – not a bad bag for the third-largest company on the ASX.

It’s not just this year either. For beyond two-and-a-half decades, CSL has been a winner – ever since floating for $2.30 per share back in 1994 to be precise.

But I think the question we have to ask ourselves today, probably on the brink of yet another altitude climb – when should we stop buying this company?

Is CSL too expensive?

The 95-year old vice-chairman of Berkshire Hathaway (and Warren Buffett’s right-hand man) Charlie Munger likes to say that ‘no matter how wonderful [a business] is, it’s not worth an infinite price. We have to have a price that makes sense…’

I think this advice is worth keeping in mind as we look at CSL.

No one is doubting that CSL is a wonderful company. Last financial year, it managed to increase its revenues by 11% to US$8.54 billion, as well as its net profits after tax by 17% to US$1.92 billion. It also expects profits to grow by a further 7–10% next year.

That’s all wonderful, but if we look at the CSL share price today, we can see it’s trading for nearly 43 times its earnings, which is far above the current market average of 18.

Foolish takeaway

I personally think CSL is too expensive at the current share price, and I will be waiting for a more attractive entry point. It’s no doubt a wonderful business, but I just don’t think the current share price justifies its future earnings growth potential, and I will wait patiently for a better deal to (hopefully) come along.

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Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. 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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