Biotechnology company CSL Limited (ASX: CSL) has had a stellar run after releasing its half yearly earnings report on February 14. The stock is up 16% since then, bringing the annual gain to about 33%.
After closing Friday's trading session at $165.57, the company's valuation of around 36 times projected FY18 earnings appears to be getting stretched. Is it time for investors to take profits?
Market beat drives record highs
CSL delivered another exceptional operational result for the 6 months ended 31 December 2017. Net profit after tax (NPAT) increased by 35% to US$1,086 million (up 31% at constant currency) with earnings per share rising 36% to US$2.40 (up 32% at constant currency) for the period.
Revenue for the period grew by 12.8% to US$4,147 million with the notable standouts being specialty products and Seqirus. Specialty revenues rose 21.9% to US$717 million due to the successful launch of HAEGARDA and a 32% rise on the prior corresponding period (pcp) for Kcentra in the U.S. A particularly severe strain of influenza in the Northern Hemisphere was the catalyst in revenues for Seqirus increasing 27.6% to US$791 million.
CSL's bottom line result and full year guidance raise beat market expectations and has propelled the stock to a record high of $167.66 on March 12. The main driver for the beat was the surge in earnings before interest and tax (EBIT) margins from 29.8% to 35.6%. Group margins improved materially due to a shift in Immunoglobulin mix, a transition of Haemophilia portfolio, specialty products growth, uneven expenditure timing and a strong seasonal performance from Seqirus which delivered a segment profit of US$185 million compared to the US$3 million loss in the pcp.
FY18 guidance was for NPAT to be within the range of approximately US$1,550 to US$1,600 million at constant currency. Net profit is skewed heavily towards the first half due to the seasonality of Seqirus' influenza business and the planned increase in research & development expenses.
Foolish takeaway
CSL remains one of the best companies on the Australian market, particularly in the large cap space and its track record in growing earnings over the long term warrants a premium to the general market. With the stock trading at 36 times forward earnings for FY18, I think most of the growth is priced in for the near term. However, for long term orientated investors I wouldn't take profits just yet. The underlying business is still growing strongly which should lead to higher earnings and share price appreciation over the long term.
