CSL Limited (ASX: CSL) shares are trading on a very high price/earnings (P/E) ratio. Is the ASX healthcare share an opportunity or is it overpriced?
The company is still valued more than 10% below its pre-COVID share price, so the market doesn't think as highly of the business now as it did four years ago.
Valuation
The giant ASX biotech share is currently trading on a P/E ratio of more than 42, based on its statutory earnings per share (EPS) in the FY23 result. That means it's priced at 42 times last financial year's earnings.
That's so much higher than other businesses like Wesfarmers Ltd (ASX: WES), Commonwealth Bank of Australia (ASX: CBA) and Woolworths Group Ltd (ASX: WOW).
When a relatively small business is growing rapidly, a higher P/E ratio can make sense to factor in how much bigger the profit generation might be in two or three years. However, CSL is massive – it has a market capitalisation of over $138 billion according to the ASX.
Looking at some earnings projections, Commsec's numbers put the CSL share price at 32 times FY24's estimated earnings. Using the broker UBS' projection for FY24, the ASX healthcare share is valued at 30 times FY24's estimated earnings.
Is the CSL share price good value?
UBS certainly thinks so – it has a buy rating on the company with a price target of $340. That implies a possible rise of 18% over the next 12 months. But, a forecast is not a guarantee that it will happen.
The broker is expecting CSL to generate EPS of US$6.37 in FY24 and then profit could rise another 18% in FY25 to US$7.50.
UBS notes that CSL's competitor in the autoimmune space, Argenx, could launch a new therapy in mid-2024 in the US, though other geographies could take longer. This is important because a sizeable amount of CSL's revenue is related to this. But, based on "probable patient selection criteria for treatment", UBS has ballparked a potential impact to CSL in the "low single digits with potential offset by supportive pricing."
The broker thinks this possible downside is captured in the current CSL share price.
UBS also recently pointed out that CSL said at its capital markets day that the path for the Behring division's gross profit margin recovery to pre-COVID levels will take three to five years, with double-digit earnings growth expected in the medium term. Capital expenditure is set to fall in FY24 as "efficiencies are driven from the existing plasma collection capacity."
The broker also noted CSL's pipeline, with the most interesting feature being "the disclosure of pre-clinical projects in vaccines". UBS said:
CSL is considering going beyond its existing flu and nascent Covid businesses and is looking at trying to immunise against other respiratory viruses including RSV, HMPV and HPIV, the latter two of which have no vaccine. There is no data to see yet, but we regard this ambition as interesting given embedded expertise in the business.
CSL share price snapshot
Investors are feeling more optimistic about the business in recent times – over the past six months CSL shares are up more than 9%.
