Better ASX 200 healthcare share: CSL vs. Resmed

Can either of these businesses achieve healthy returns?

| More on:
A group of three scientists talking excitedly while working in a lab on a diabetes test developed by Proteomics International Laboratories which is an ASX share tipped to explode by Alto Capital

Image source: Getty Images

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Key points

  • There are some strong healthcare shares in the ASX 200
  • ResMed and CSL are both expected to grow profit in the coming years
  • But, CSL’s profit growth is projected to be faster, while spending a lot on research and development

S&P/ASX 200 Index (ASX: XJO) healthcare shares could be a good source to find opportunities that can deliver solid returns. There are a number of strong businesses in the space such as CSL Limited (ASX: CSL), ResMed Inc (ASX: RMD), Cochlear Limited (ASX: COH), Ramsay Healthcare Limited (ASX: RHC) and Pro Medicus Ltd (ASX: PME).

I think ResMed and CSL are two of the strongest within that list, so I'm going to do a little comparison between them in this article.

For readers that haven't heard of these two names, I'll provide a brief summary of what they do.

ResMed provides continuous positive airway pressure (CPAP) machines, equipment and digital health to help treat sleep apnea. The business also offers cloud-connected ventilators as well as out-of-hospital healthcare management software.

CSL is one of the world's largest biotechnology businesses. It's involved in things like blood plasma collection and plasma-derived products, vaccines and iron deficiency treatments.

Recent performance

The ResMed share price growth has been impressive over the past five years, with a rise of around 160%. That's thanks to the growth of its core sleep apnea offering, as well as expansion in the software side of things.

Created with Highcharts 11.4.3ResMed PriceZoom1M3M6MYTD1Y5Y10YALL28 Apr 201827 Apr 2023Zoom ▾Jul '18Jan '19Jul '19Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '232019201920202020202120212022202220232023www.fool.com.au

The CSL share price hasn't done quite as well, with a rise of close to 80% in the past five years. It has seen growth in areas like its plasma division, the vaccine division and the recent acquisition of Vifor.

Created with Highcharts 11.4.3CSL PriceZoom1M3M6MYTD1Y5Y10YALL28 Apr 201827 Apr 2023Zoom ▾Jul '18Jan '19Jul '19Jan '20Jul '20Jan '21Jul '21Jan '22Jul '22Jan '232019201920202020202120212022202220232023www.fool.com.au

Which valuation looks better?

One of the main ways to compare these two ASX 200 healthcare shares is to see which price/earnings (P/E) ratio is better value.

Using the profit forecast on Commsec, which is as good as any, the ResMed share price is valued at 35 times FY23's estimated earnings.

The CSL share price is valued at 37 times FY23's estimated earnings.

CSL is priced slightly more expensively than ResMed, despite its market capitalisation being substantially higher. Investors may consider a very large business like CSL as having fewer growth prospects because it's already massive, so it could be surprising it's trading on a higher valuation.

But, profit growth expectations can play a part.

CSL's earnings per share (EPS) could grow by 45% to FY25, which would put it at 25 times FY25's estimated earnings.

Meanwhile, ResMed's EPS could rise by 28% to FY25, which would put the business at around 27 times FY25's estimated earnings.  

By the time FY25 finishes, CSL could be the better value choice if it's able to deliver on profit growth.

I should mention that CSL is spending huge amounts on research and development. This cuts into the company's profit for that year, but then helps the business unlock new earnings streams from the new products they've made.

In FY22, CSL said that it spent $1.16 billion on research of development, so its profit could be boosted significantly if it were to suddenly stop spending. But it's better that it does keep spending for the long term.

Having looked at the projected direction of earnings, and CSL's ongoing heavy investment in research and development, it would be my ASX 200 healthcare share pick.

What about the dividend?

Neither business has a high dividend yield, and I don't think it's a deciding factor. But, it's worthwhile to look at the yields of these ASX 200 healthcare shares.

Commsec numbers suggest CSL could pay a dividend yield of 1.1% in FY23 and ResMed could pay a dividend yield of 0.8% in FY23. There's not a lot in it, so I'm sticking with my preference for CSL shares.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended CSL, Cochlear, Pro Medicus, and ResMed. The Motley Fool Australia has positions in and has recommended Pro Medicus and ResMed. The Motley Fool Australia has recommended Cochlear. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Healthcare Shares

Broker analysing the share price.
Healthcare Shares

Expert: 2 ASX healthcare stocks to avoid before reporting season

Not all healthcare stocks are created equal.

Read more »

A group of people in a corporate setting do a collective high five.
Healthcare Shares

Should I buy Pro Medicus or CSL shares ahead of earnings season?

The ASX healthcare sector may be currently undervalued.

Read more »

Overjoyed man celebrating success with yes gesture after getting some good news on mobile.
Healthcare Shares

Why Mesoblast shares can keep storming higher

More big returns could be on the way for buyers of this high risk stock according to Bell Potter.

Read more »

Doctor doing a telemedicine using laptop at a medical clinic
Healthcare Shares

The Mesoblast share price just rocketed 38%! Here's why

ASX investors just sent the Mesoblast share price up 38%. But why?

Read more »

couple having a happy discussion with a banker
Healthcare Shares

Expert: 4 ASX healthcare stocks to buy ahead of reporting season

Could these ASX healthcare stocks be good additions to your portfolio?

Read more »

Excited couple celebrating success while looking at smartphone.
Healthcare Shares

Guess which ASX 200 stock just jumped 9% on big news

Let's find out what is getting investors excited today.

Read more »

Male doctor in a lab coat working at laptop looking serious.
Healthcare Shares

What are Cochlear shares worth according to Macquarie?

Let's see what the broker is saying about this blue chip.

Read more »

Shot of a mature scientists working on a laptop in a lab.
Healthcare Shares

When will CSL shares finally catch a break?

Here's where analysts think the biotech stock is heading next.

Read more »