CSL Limited (ASX: CSL) is involved in the development, manufacturing and marketing of pharmaceutical and diagnostic products, and human plasma fractions. CSL is a market darling that has rewarded shareholders with 467% capital growth in the last decade.
CSL recently broke through the $200 share price barrier, joining Cochlear Limited (ASX: COH) in this exclusive club.
The breakthrough was another instalment in an impressive 12 months, with CSL increasing from a 52-week low of $119.01.
This share price performance is largely reflected in revenue growth for the company. In the 2008 financial year, CSL received $3.75 billion in revenue. Fast forward to the 2017 financial year and CSL increased this number to $8.99 billion.
In that same time period, CSL grew earnings per share from $1.27 to $3.81 whilst increasing dividends paid per share from $0.46c to $2.03. Consequently, between 2008 and 2017, CSL has returned $24.60 in earnings per share whilst paying out $11.24 in dividends per share.
As such, over the 10 years preceding 30 June 2017, CSL retained $13.36 in earnings per share. Concurrently, book value per share grew from $5.10 to $9.07 meaning that for every $1 retained by CSL, $0.30c was added to the balance sheet.
With a market capital of $89.9 billion and a P/E ratio of 39, this negative return on retained earnings is alarming. Additionally, CSL has grown long-term debt on the balance sheet from $825.1 million in 2008 to $5 billion as at 30 June 2017.
Attempting to explain this current negative return on retained earnings, in the 2017 financial year, CSL spent $645.3 million on research and development, while also splashing out $697 million on sales and marketing.
As with every investment on the share market, if you trust management's allocation of spending, CSL is a company earning money now and investing in earnings for the future. However, with a P/E ratio of 39, is CSL too expensive?
At 30 June 2017 CSL was a company with $3.16 billion in equity producing $1.77 billion in operating profit. According to recent estimates, CSL is expected to turnover approximately $2.31 billion for the 2018 financial year.
Simply speaking, how much are you willing to pay for a company that earns $2.31 billion in operating profit whilst investing significantly for the future? The market says $89.9 billion which is suggesting that CSL has plenty of room to grow.
Foolish Takeaway
Despite my admiration of this company, I think the market is valuing CSL too high. Whilst return on retained earnings is negative, I'm inclined to believe management is investing for future returns. However, I'm happy to wait on the side lines until these returns are realised.
