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Is the CSL share price worth close to $400 a pop?

The CSL Limited (ASX: CSL) share price may have surged to a record high on Thursday but there could be another circa 20% upside to the share price if more stars align for the blood products developer.

Shares in CSL jumped 1.6% to $320.62 on Thursday and is up 70% over the past 12 months compared with the 17% increase in the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.

CSL isn’t the only one on a record high. The Wesfarmers Ltd (ASX: WES) share price, Ansell Limited (ASX: ANN) share price and Cochlear Limited (ASX: COH) share price have broken new records too.

Why CSL can trade at high premiums

Investors just aren’t worried about sky-high valuations. The market is willing to pay nose-bleeding prices for “guaranteed” growth as these companies are in very good positions to lift earnings over the next year or more.

In case you’ve been living under a rock, growth is in very short supply these days and cashed up investors have a shrinking pool of options to park their capital.

This is unlikely to change in the foreseeable future, and that’s why CSL is fearlessly trading on a 50 times trailing price-earnings (P/E) multiple.

Another 18% upside for CSL?

CSL supporters will be further emboldened by Morgan Stanley’s assessment that fair value for the stock could be as high as $379 a pop!

To be sure, this isn’t the broker’s price target. The broker’s 12-month price target for CSL is $306 a share, according to the Australian Financial Review.  

But if CSL delivers a result that’s ahead of the market’s lofty expectations (and that can’t be ruled out), then Morgan Stanley’s bullish price target will become the new norm.

Earnings surprise

What could drive a better than expected result is a stronger than expected immunoglobulin growth. This is an area that CSL dominates.

Morgan Stanley is forecasting CSL to post revenue of US$4.7 billion ($6.96 billion) and net profit after tax of US$1.27 billion for the half-year. Management is guiding for a full year net profit of between US$2.1 billion and US$2.11 billion on a constant currency basis.

While CSL is already trading ahead of the broker’s official price target, Morgan Stanley is sticking to its “overweight” (equivalent to a “buy”) recommendation on the stock.

Perhaps it’s assigning a better than even chance for CSL to deliver a pleasant surprise later this month. The rest of the market seems to be.

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Brendon Lau has no position in any of the stocks mentioned. Connect with him on Twitter @brenlau.

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd. and CSL Ltd. The Motley Fool Australia owns shares of Wesfarmers Limited. The Motley Fool Australia has recommended Ansell Ltd. and Cochlear Ltd. 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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