Is it crazy to buy CSL shares with a P/E ratio over 40?

Is the stock on an unhealthy valuation?

| More on:
Shot of a mature scientists working on a laptop in a lab.

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

CSL Limited (ASX: CSL) shares are trading on a very high price/earnings (P/E) ratio. Is the ASX healthcare share an opportunity or is it overpriced?

The company is still valued more than 10% below its pre-COVID share price, so the market doesn't think as highly of the business now as it did four years ago.

Valuation

The giant ASX biotech share is currently trading on a P/E ratio of more than 42, based on its statutory earnings per share (EPS) in the FY23 result. That means it's priced at 42 times last financial year's earnings.

That's so much higher than other businesses like Wesfarmers Ltd (ASX: WES), Commonwealth Bank of Australia (ASX: CBA) and Woolworths Group Ltd (ASX: WOW).

When a relatively small business is growing rapidly, a higher P/E ratio can make sense to factor in how much bigger the profit generation might be in two or three years. However, CSL is massive – it has a market capitalisation of over $138 billion according to the ASX.

Looking at some earnings projections, Commsec's numbers put the CSL share price at 32 times FY24's estimated earnings. Using the broker UBS' projection for FY24, the ASX healthcare share is valued at 30 times FY24's estimated earnings.

Is the CSL share price good value?

UBS certainly thinks so – it has a buy rating on the company with a price target of $340. That implies a possible rise of 18% over the next 12 months. But, a forecast is not a guarantee that it will happen.

The broker is expecting CSL to generate EPS of US$6.37 in FY24 and then profit could rise another 18% in FY25 to US$7.50.

UBS notes that CSL's competitor in the autoimmune space, Argenx, could launch a new therapy in mid-2024 in the US, though other geographies could take longer. This is important because a sizeable amount of CSL's revenue is related to this. But, based on "probable patient selection criteria for treatment", UBS has ballparked a potential impact to CSL in the "low single digits with potential offset by supportive pricing."

The broker thinks this possible downside is captured in the current CSL share price.

UBS also recently pointed out that CSL said at its capital markets day that the path for the Behring division's gross profit margin recovery to pre-COVID levels will take three to five years, with double-digit earnings growth expected in the medium term. Capital expenditure is set to fall in FY24 as "efficiencies are driven from the existing plasma collection capacity."

The broker also noted CSL's pipeline, with the most interesting feature being "the disclosure of pre-clinical projects in vaccines". UBS said:

CSL is considering going beyond its existing flu and nascent Covid businesses and is looking at trying to immunise against other respiratory viruses including RSV, HMPV and HPIV, the latter two of which have no vaccine. There is no data to see yet, but we regard this ambition as interesting given embedded expertise in the business.

CSL share price snapshot

Investors are feeling more optimistic about the business in recent times – over the past six months CSL shares are up more than 9%.

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 and Wesfarmers. The Motley Fool Australia has positions in and has recommended Wesfarmers. 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.

More on Healthcare Shares

Man jumps for joy in front of a background of a rising stocks graphic.
Healthcare Shares

Guess which ASX All Ords stock is jumping on big US news

This small cap is catching the eye on Thursday. But why?

Read more »

three excited doctors with hands in the air
Healthcare Shares

Two ASX healthcare shares that could be set to double

This broker has buy recommendations on these two shares. 

Read more »

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

Telix shares jump 7% on big US news

Let's see what is getting investors excited on Wednesday.

Read more »

An older gentleman leans over his partner's shoulder as she looks at a tablet device while seated at a table.
Healthcare Shares

Macquarie tips 28% upside for this ASX healthcare stock

The broker expects big things from this New Zealand retirement village developer and operator.

Read more »

Teamwork, planning and meeting with doctors and laptop for medical, review and healthcare. Medicine, technology and internet with group of people for collaboration, diversity and support in hospital
Healthcare Shares

$10,000 invested in these ASX healthcare shares 5 years ago is now worth…

These healthcare stocks have brought big returns for investors 

Read more »

A man wearing a white coat and glasses is wide-mouthed in surprise.
Healthcare Shares

Guess which ASX 300 stock is crashing 55% today

What's going on with this stock? Let's see why investors are hitting the sell button.

Read more »

Woman serving customer in pharmacy.
Healthcare Shares

Up 132% in a year, are Sigma Healthcare shares still a good buy post the Chemist Warehouse merger?

After gaining 132% in 12 months, it too late to buy Sigma Healthcare shares today?

Read more »

Three scientists wearing white coats and blue gloves dance together in a lab.
Share Market News

Is it too late to buy Pro Medicus shares?

Pro Medicus shares have risen 550% over 3 years. Have you missed the boat? Three experts weigh in.

Read more »