Shares in biotechnology company CSL Limited (ASX: CSL) briefly passed the $100 mark in August before declining by over 10% in-line with the wider market crash. Certainly, their fall of 4% in the last month alone is disappointing but, over the medium to long term they appear set to soar well past the $100 mark.
A key reason for this is the fact that CSL's profitability is less correlated with the wider economy than for most stocks. As such, the potential for a recession in Australia and the uncertainty which has gripped the global economy are unlikely to affect CSL to the same extent as for many of its index peers. For example, it continues to make excellent progress with the development of new treatments, while the integration of the recently acquired influenza business from Novartis for around $380m is also likely to boost earnings moving forward.
In addition, CSL generates the majority of its revenue from outside of Australia. This means that the falling interest rate and subsequently weaker Aussie dollar is good news for the business, since it equates to a boost in the company's bottom line. And, with growth prospects for the wider ASX being somewhat downbeat, investors may be willing to rerate upwards shares in CSL.
Clearly, CSL trades at a premium to the ASX, with it having a price to earnings (P/E) ratio of 22.8 versus 14.8 for the wider index. However, when CSL's earnings growth forecasts for an annualised increase in earnings over the next two years are taken into account, its price to earnings growth (PEG) ratio of 1.4 is in-line with that of the wider market. And, with CSL having a very stable track record of growing its bottom line (earnings have risen by almost 22% per annum during the last decade), it could be worth a larger premium to the wider index.
Furthermore, CSL is financially very sound. It has a debt to equity ratio of 83% and, in the last five years, has posted a rise in cash flow per share of almost 13% per annum. Despite this, it still pays out just 43% of earnings as a dividend which, when combined with its share price growth of 163% during the last five years, means that CSL yields just 2%. But, with dividends due to rise by 15% next year, it could become a much more appealing stock over the medium term, while the reinvestment of capital is aiding CSL's R&D and strengthening its product pipeline. Notably, CSL has new haemophilia treatments as well as opportunities within its specialties portfolio which should underpin growth in the coming years.
So, while the outlook for the ASX may be somewhat uncertain, CSL has the potential to soar past $100 per share owing to its growth potential, valuation and excellent business model. And, with a beta of just 0.6 its shares should offer a less volatile shareholder experience than the wider index on their way up to treble figures, too.
