Put down the pitchforks! Stay your torches! I realise that criticising one of the most loved market darlings out there isn't going to make me many friends today.
Especially considering that (once again) CSL Limited (ASX: CSL) shareholders have enjoyed a year of spectacular gains. CSL shares started January at $185.38 a share, but as I write the market is asking $287 for a CSL share – a YTD increase of 55%.
CSL has also banked more record highs this year than Willie Nelson – breezing past its 2018 high of $225 back in August.
But I'm not convinced CSL would make a great investment today. Here's why.
How fast is CSL growing?
Make no mistake, CSL is growing at a healthy rate – especially for such a large company. Between 2016 and 2017, CSL's earnings grew by 8%. In 2018, the company booked a 29% gain and this year another 11% on top.
It's worth noting that CSL reports its revenue and earnings in US dollars, so falls in the AUD/USD exchange rate increase these numbers when reported to us. That partly explains CSL's bumper 2018 earnings that accompanied a steep fall in the value of our own dollar.
So what's not to like about CSL?
Don't get me wrong, CSL is a top-notch company with a long history of healthy growth. It's also in an industry (healthcare) that benefits from a defensive earnings base and tailwinds that come from an ageing population across the world's advanced economies. I would love to own some in my own portfolio.
But here's my one problem with this stock. CSL is currently trading on an eye-watering 46.8 times its 2019 earnings. That means if you buy CSL shares today, it will take almost 47 years to recoup your investment if earnings don't grow any further than 2019's levels.
I'm not suggesting this is going to happen, but it tells me that the market is assuming another decade (if not more) of double-digit earnings growth. That's a fairly optimistic assumption for a $130 billion company.
Another thing to keep in mind is currency. If our dollar trends back towards its long-term average of around 75 US cents, CSL's earnings will almost certainly be affected (albeit temporarily).
Foolish takeaway
I'm not doubting that CSL will continue to be a great stock to hold in your portfolio if you already own it. But I don't see great value in the current share price for new buyers today. A price-to-earnings ratio of 47 is a little too high (in my opinion) for such a large and established business. I would love to own shares one day, but I'll be waiting for a better opportunity than what today is offering.
As Charlie Munger says: "No matter how wonderful [a business] is, it's not worth an infinite price."
