The CSL Limited (ASX: CSL) share price closed 0.38% lower at $278.12 on Friday afternoon, up an impressive 50% YTD.
CSL has grown from strength to strength over the past two decades, evolving from a modest federal government department back in 1994, to now become the second-largest company on the ASX, with a market capitalization of $126 billion. The company has become a global market leader in blood plasma research and disease treatment, reaching more than 60 countries and employing 22,000 people.
A key factor underpinning its strong growth has been its high investment in research and development to create new products.
In addition, CSL's earnings base is essentially shielded from any business cycle downturn, as vaccines and blood medicines are required regardless of the prevailing market conditions.
CSL recorded another year of very strong growth in FY2018-19 with NPAT of $1.9 billion, up 17% and revenue up 11% (constant currencies). Over the last 3 years, its earnings growth has averaged 16.5% annually.
Like other ASX listed global healthcare stocks such as ResMed Inc (ASX: RMD) and Cochlear Limited (ASX: COH), CSL has benefited from the falling Australia dollar.
Is CSL's high P/E ratio a reason not to invest?
CSL's P/E ratio is 44.8, significantly above the ASX market average of 18. However, a high current P/E ratio can still lead to strong share price growth over the medium to long term, as long as the company has strong market differentiation and strong growth potential across its major divisions. CSL definitely passes both these tests.
It is interesting to note that over the past 10 years, CSL's P/E ratio has always been well above the market average, while its share price has continued to go up and up. A similar trend has been seen with other top Australian growth shares such as REA Group Ltd (ASX: REA), Carsales.Com Ltd (ASX: CAR), Seek Limited (ASX: SEK) and Cochlear.
In fact, if you had stayed away from investing in CSL because of its high P/E ratio over the past five to ten years, then you would have missed out on a huge market gain. If, for example, you had invested $10,000 in CSL back in 2012, that investment would now be worth a staggering $72,000.
Also, CSL's P/E ratio of 44.8 is actually lower than two of its major healthcare competitors: ResMed Inc (46) and Cochlear (47).
Strong earnings growth set to continue
CSL is well-positioned to continue to deliver strong earnings growth over the next five to ten years, driven by a strong new product development pipeline, a continued fast-growing plasma collection network, and a steadily increasing global demand for immunoglobulin products.
CSL has invested over US$3 billion in research and development over the last five years and has already registered over 20 new biotech products during this year alone. This creates a pipeline of new and innovative products that provides additional revenue streams and creates an even larger moat to protect against market competition.
Equally important is CSL's proven track record in selecting the right areas to invest in that will bear fruit for the company further down the track.
Foolish bottom line
I believe that the CSL success story is set to continue. FY2020 NPAT is forecast to be up by another 7-10%.
However, expect some volatility in the CSL share price over the next 3 to 6 months, in light of the CSL share price being very close to all-time highs and global influences such as US-China trade talks.
Despite this, I still think that CSL is a good buy at its current share price, as long it is purchased with a long-term outlook in mind and as part of a diversified share portfolio.
