Is the CSL (ASX:CSL) share price a buy?

Is the CSL Limited (ASX:CSL) share price a buy right now? It is the biggest ASX business, but I still think it has a lot of growth potential.

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CSL share price

Is the CSL Limited (ASX: CSL) share price a buy right now?

CSL is commonly regarded as one of the highest-quality businesses out there at the moment.

What has been happening recently?

The CSL share price is still down 12.3% from its pre-COVID-19 high, so it hasn’t recovered as much as many investors would like.

CSL didn’t fall as much as many shares from the peak to the bottom during the COVID-19 crash. On the share price front, it hasn’t done much over the past few months.

The recent CSL updates have been interesting but haven’t moved the market much.

FY20 was a solid result. Revenue went up 9% in constant currency terms and net profit after tax (NPAT) grew 17% in constant currency terms to US$2.1 billion.

At the time of the FY20 profit release, it provided FY21 net profit guidance of between US$2.1 billion to US$2.265 billion. That would have been growth of between 0% to 8%.

The annual general meeting (AGM) sort of included a profit upgrade. It changed that profit guidance to a range of US$2.17 billion to US$2.265 billion. This guidance implies FY21 net profit growth of between 3% to 8%. It’s pleasing to see that CSL is expecting yet another year of profit growth.

It’s still expecting strong demand for plasma and recombinant therapies to continue. CSL also expects strong demand for flu vaccines. Sales of albumin is expected to return to normal after the successful transition to the new business model in China. These are all pleasing points. 

However, COVID-19 restrictions are expected to hurt the company’s ability to collect plasma and this will add to the overall cost of collection. But CSL said it has multiple initiatives to mitigate this impact.

One of the most important developments recently is that CSL is investing in its research and development response to COVID-19. It is responsible for manufacturing the COVID-19 vaccine in Australia. This is on top of its normal R&D expenditure, so it expects to spend about 10% to 11% of revenue on R&D.

Why I think the CSL share price is a buy

It’s the R&D that makes me most willing to buy CSL shares. That’s despite the CSL share price trading at 34x FY23’s estimated earnings.

CSL expenses its R&D each year. In FY20 it spent US$922 million on R&D, compared to its net profit of US$1.9 billion. It would obviously be much more profitable if it spent $0 on R&D. But it’s the R&D that will open up new earnings streams for CSL in the coming years.

There is a potential scenario where people need a regular COVID-19 booster and it’s likely that CSL would be the company to manufacture it for Australia.

Despite its huge size, CSL continues to become more profitable with higher margins, which is the sign of a great business. In FY20 CSL grew its gross profit margin from 56% to 57.1% and the earnings before interest and tax (EBIT) margin rose from 29.3% to 29.7%.

There are few ASX shares in the ASX 100 that are in the healthcare industry, which earn a lot of profit internationally and have a long-term growth runway. CSL offers an attractive combination of growth and defence. 

Even if the CSL share price looks a little expensive, I think it’s worth buying today for the long-term. Quality businesses are able to generate good returns even if economic conditions are a bit tough.

There are also other bigger ASX shares I’d be willing to consider for my portfolio including A2 Milk Company Ltd (ASX: A2M), Magellan Financial Group Ltd (ASX: MFG) and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL).

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Tristan Harrison owns shares of Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of and has recommended A2 Milk and Washington H. Soul Pattinson and Company Limited. 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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