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Is the CSL share price fairly valued?

The CSL Limited (ASX: CSL) share price has gone off the radar somewhat in recent months. If we cast our minds back to 2019, CSL shares were the hot stock to own. Everyone was talking about how high CSL could go. And boy did it get high, so to speak. Over the course of the 2019 calendar year, CSL shares rose from around $188 in early January to around $276 by the end of December (nearly 47%).

But over the course of 2020, sentiment on CSL shares has cooled somewhat. The CSL share price started the year at $275.04 and climbed another 24.5% all the way to its all-time high of $342.75 in mid-February. But then the March coronavirus-induced crash came and CSL plummeted back down to roughly $270. Today, CSL shares are asking $288.88 (at the time of writing).

Now, CSL shares are beating the S&P/ASX 200 (INDEXASX: JXO) on a year-to-date returns benchmark. CSL shares are still up roughly 5.12% year to date, whereas the ASX 200 is still nursing a 10% loss for the year so far.

But since 23 March (when the ASX 200 bottomed), the index has risen more than 32%, whilst CSL shares are up 2.5%.

So I think it’s fairly safe to draw the conclusion that CSL is no longer considered the ‘growth wunderkind’ that it was last year in many ASX investors eyes.

Is the CSL share price fairly valued?

So with the current CSL share price inertia, can we consider the shares to be ‘fairly valued’ today? Well, let’s look at how the market is currently pricing CSL shares.

The current CSL share price (at the time of writing) is $288.88. this gives CSL a market capitalisation of $131.18 billion and a price-to-earnings (P/E) ratio of 44.8. It also offers a trailing dividend yield of 1.01% on these current prices.

In the 2018/19 financial year, CSL brought in US$8.21 billion in revenues and US$1.92 billion in net profits after tax (NPAT). This was an increase of 8.13% and 11% respectively over the 2017/18 financial year.

This is healthy growth to be sure, but does it really justify a P/E ratio of 44.8? I’m not so sure.

The current ASX 200 average P/E ratio is around 16.6, going off the iShares Core S&P/ASX 200 ETF (ASX: IOZ). So you are paying a ~2.5x premium for this company over the market average. Does revenue growth of ~8% and profit growth of 11% justify this premium? Not in my eyes.

Foolish takeaway

Therefore, I don’t think CSL shares are trading at ‘fair value’ today, just going off these humble calculations. I like CSL as a company. It has grown spectacularly over the past 2 decades. But I’m not willing to pay nearly 45x earnings for this company today and I think there are better offers elsewhere.

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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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