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Is the CSL share price overvalued?

You’d have to be living under a rock not to have heard about the raging success of CSL Limited (ASX: CSL). By far the most successful blue-chip on the ASX in recent years, CSL has been consistently printing new all-time highs over the course of this year – most recently this Monday ($287.31).

Even in the market volatility that has infected the stock market this week, CSL shares are today sitting at $277.62 (at the time of writing) – hardly even a ‘dip’ in the scheme of things.

But CSL’s rampant share price growth has started to raise some eyebrows at a valuation level. The company now trades on a earnings multiple of over 44, which is quite a premium to be asking of investors.

Sure, CSL is still a healthy company and a growth engine – but this price is assuming growth will sharply accelerate from here, which I think is optimistic to say the least.

According to reporting in the Australian Financial Review (AFR), I’m not the only one who thinks CSL’s share price might have gotten a little carried away.

SG Hiscock fundie Hamish Tadgell is quoted as stating:

CSL is a prime example of a quality company which has seen its share price pushed to extreme levels by return-hungry investors…CSL is a fabulous business. I’ve been following it for 20 years and I don’t think that it’s been in better shape than at the moment. But it’s a long-duration business that’s trading on 45 times [earnings]. That valuation is looking pretty stretched.

Mr Tadgell also warns that if the market comes off the boil, we could see CSL trading at an earnings multiple closer to 30, which implies a share price around $187. That implies a possible downside of around 30% from today’s prices.

Of course, we did see something like that happen in the Christmas correction last year. CSL shares slumped to $173.33 in December 2018 after the broader market was violently sold-off.

Foolish takeaway

Although the CSL share price is undoubtedly expensive, you are also paying for a top-notch company on which a premium price is arguably justified. How much of a premium you’re willing to pay is a personal choice, but I personally will wait for a better opportunity than today presents.

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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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