Why has Goldman Sachs just upgraded CSL shares?

This biotech giant could be in the buy zone according to a leading broker.

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Now could be the time to snap up CSL Limited (ASX: CSL) shares.

That's the view of analysts at Goldman Sachs, which believe that now is a "compelling entry point after [a] multiple de-rate."

Why are CSL shares a buy?

Goldman has been looking at the biotherapeutics giant's outlook and believes it is entering a capital-efficient growth period. In light of this, the broker is forecasting major improvements in its returns between now and FY 2027. It said:

CSL is now entering a period of more capital-efficient growth, driving a sharp improvement in our ROIC forecast (+460bps by FY27E). This positive inflection also coincides with a period of historically-high earnings growth (+14% CAGR FY23-27E), which serves to amplify those incremental returns to shareholders.

Goldman also highlights that despite the above, CSL shares are trading at a significant discount to historical levels. Though, it suspects that if its predictions come true, this discount won't last long. It adds:

Although CSL's valuation has historically correlated closely with our measure of forward returns, this relationship broke down through FY22-23 as the NTM P/E multiple de-rated more quickly than expected (from c.46x in Jun-21 to c.23x in Oct-23). However, the forward profile is now materially stronger, and we expect reported improvements in margins/returns through the upcoming periods to once again drive a re-rating in the shares.

Major upside potential

According to the note, the broker has upgraded CSL's shares to a buy rating with a $309.00 price target.

Based on its current share price, this implies a potential upside of 22% for investors over the next 12 months.

All in all, Goldman appears to believe this could be a great time for investors to snap up the shares of one of Australia's highest-quality companies.

Motley Fool contributor James Mickleboro has positions in CSL. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has positions in and has recommended CSL and Goldman Sachs Group. The Motley Fool Australia has recommended CSL. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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