The CSL Limited (ASX: CSL) share price has been edging higher in recent weeks. But could it see even further gains as it grows profit?
One expert has outlined why the business could see a promising future.
Writing in an article on Livewire, Kristiaan Rehder from Kardinia Capital said that the end of easy money and the normalising of conditions means that markets are now rewarding stock pickers "more than ever".
He noted there has been a reduction of the price-to-earnings (p/e) ratio, which is "well-progressed". Though there have not been "meaningful earnings downgrades across the broader Australian market".
Kardinia Capital is expecting further p/e multiple contraction "coupled with earnings downgrades," making for a "challenging investment environment".
Rehder said that, in this market, companies with a track record and earnings quality "come to the fore, giving an advantage to a well-structured investment process with a more disciplined approach".
Rehder then picked some ASX shares the investment team believes could outperform over the next five years, including CSL shares.
Strong tailwinds
The fund manager describes the business as developing "plasma-derived and recombinant therapies to treat serious diseases". Further, it "manufactures influenza vaccines and treats iron deficiency and kidney disease following its recent acquisition of Vifor".
One of the things that attracted Kardinia Capital was that CSL's management has "proven adept at maintaining high returns," with a return on invested capital (ROIC) of at least 20%. The fund manager attributed that to "consistent product development and innovation to drive growth into existing and new markets".
Another positive element to the business, in the fund manager's eyes, is that the company has a high market share in industries that have "strong tailwinds".
Double-digit earnings growth predicted
At the moment, CSL has higher levels of debt because of the amount of funding it needed to acquire the Vifor business. The business raised about $7 billion in a capital raising, though the total acquisition price represented US$11.7 billion, or AU$16.4 billion, at the time of the deal.
However, the fund manager believes that "strong cash flows" will help gearing return to a "more manageable level".
Rehder said that the CSL share price is trading on a "high earnings multiple". But, the fund manager suggests the valuation is attractive. That's because the pharma is "expecting double-digit earnings growth over the next few years as plasma collections recover post-pandemic".
Recent CSL share price movements
Over the past month, CSL has gone up by around 4%.
