CSL Limited (ASX: CSL) develop and deliver innovative biotherapies and influenza vaccines.
Shares of CSL currently trade at around $158– an increase of 24% over the previous twelve months. The 52 week high is $167.66, and the 52 week low is $119.01. With earnings per share of $3.81 in 2017, shares are currently trading at a price to earnings ratio of 41.5 based on 2017 earnings. Analysts have forecasted earnings of $4.67 per share in 2018, an increase of 22% on the previous 12 months. This puts the current share price at a price to earnings ratio of 33.8 based on forecasted 2018 earnings.
In the last 10 years, CSL has grown its book value at an annualised rate of 6.6%. The current price to book ratio is over 17. Over the same period, CSL has grown earnings at an annualised rate of 13%, and its cash flow at 11.9%.
Over its last 5 financial reports, CSL's return on invested capital has ranged from 25.5% to 39.3%, and has averaged 33%. This represents a very strong return over that period.
In 2017, CSL paid an unfranked dividend of $2.025.
So what are the shares worth?
According to its 2017 financial report, CSL held $5.01 billion in interest bearing debt, and $1.1 billion in cash and equivalents. At a current market cap of $70.57 billion, CSL's enterprise value is around $744.85 billion. With earnings before interest, tax, depreciation and amortisation (EBITDA) of $2.51 billion, the company's enterprise multiple is around 29.7. An enterprise multiple of 10 would be a fair (or in this case, cheap) price to pay, and this would necessitate a market capitalisation of $21.18 billion, and a share price of around $47.00.
A discounted cash flow model using the historical growth rate in cash flow as the growth rate for the next 10 years and then a 2% growth rate thereafter, capital expenditures equal to those in 2017, and a required return of 10% per year places the intrinsic value of the shares around $80.00. This is, of course, heavily dependent upon the growth rate and your required return. A required return of 15% would place the intrinsic value at $56.00. For CSL, however, the growth rate is also important. If you assume that the growth rate for the next ten years to be equal to its average return on invested capital – around 25% – the intrinsic value of the shares could be around $225 at a 10% rate of return, and $150 at a 15% return.
FOOLISH TAKEAWAY.
I'm not convinced that a 25% growth rate is a prudent assumption. However, if it was then shares are looking fairly priced. Based on the above, I'd be a little more conservative and say that shares are probably worth somewhere between $60 and $80. However, the calculation of intrinsic value is not an exact science. Given the historical growth in book value and returns on invested capital, I'd be happy to buy the shares at around $80, but I'm not holding my breath.
