Can the CSL Limited (ASX: CSL) share price hit $350 in 2020?
Well, the technical answer is yes.
A company's share price at the end of the day is completely up to the whims of the market. Sometimes, companies get so overpriced investors start to lose sight of the fundamentals and keep bidding to make higher profits. Lots of people call this behaviour 'irrational exuberance' and it's a common phenomenon in financial markets.
Just take a look at the Bitcoin price graph during 2017 for a visual example.
But I think the question investors really want to know is whether or not the fundamentals of CSL as a company justify the share price going to $350. After all, if that's CSL's 'true value', there should be no doubts about the wisdom of a CSL buy at $350 per share.
At the time of writing, CSL shares are going for around $331.17. It would only take another 5.7% worth of gains to push the share price up to $350.
Incidentally, if the CSL share price hits $353 a share, it will overtake Commonwealth Bank of Australia (ASX: CBA) as the ASX's largest company (assuming CBA shares stay at current levels) – which would be a remarkable feat. CommBank has long held this crown and this would signal a new era for the bank-dominated Aussie stock market.
But I digress.
Is CSL worth $350 a share?
That's the real question here. In a recent article, I outlined the difference between CommBank's profitability and CSL's. Long story short – CommBank made $8.6 billion in profits last financial year, whereas CSL made $2.86 billion.
So why is CSL snapping at CommBank's heels? Because the market is assigning it a higher earnings multiple (currently 50.32) compared to Commonwealth Bank (16.37).
This is understandable – last financial year Commonwealth Bank's earnings went backwards, whilst CSL managed to grow its own by 11%.
But to reach a price of $350 a share in 2020, the market would have to assign an earnings multiple of around 53. Since it's already at 50.32, this doesn't seem too far of a stretch.
But, this means investors would be paying $53 for every $1 of earnings CSL generates. I think this is a touch high for a company growing profits at 11%, but CSl is a top notch company and one that inevstors have always been willing to put a premium on.
Foolish takeaway
Yes, I do think the CSL share price will reach $350 a share in 2020 if positive sentiment continues to be the prevailing force behind the share market this year.
Whether I think CSL would be a good buy at $350 (or $331), well that's a different story. But if the only two choices are owning CSL at $331/$350 or not at all, I understand that's something of an investing Sophie's choice.
Choose wisely!
