The CSL Limited (ASX:CSL) share price has fallen another 1.6 per cent to trade around $202, bringing the fall from its recent peak of around $230 to over 12 per cent.
We just about nailed the top of the market for CSL shares when earlier this month, we said the CSL valuation was “off the charts.”
It has been virtually all downhill from there for the CSL share price, likely weighed down by nothing more than its own valuation. A $100+ billion company trading at 45 times earnings has a LOT of future growth priced into its share price.
Writing in the August 2018 Schroder Equity Opportunities Fund report, Martin Conlon says that a business like CSL, where the current product portfolio was fairly mature and the product pricing was fair, investors might reasonably accept a return of 8 per cent on their money, equating to 12.5 times a company’s operating profit.
CSL just reported an operating profit of $3 billion. Using the 12.5 times multiple, you might be prepared to pay $37.5 billion for the whole CSL business.
But CSL has a business valuation of around $107.5 billion, suggesting investors are paying $70 billion ($107.5b minus $37.5b) worth of future growth.
In effect, buyers of CSL shares at around current prices would be paying for nearly 2 more businesses of the same size to be created in the future, despite CSL already dominating the category in nearly all developed markets, says Mr Conlon.
CSL have been profiting by both raising prices of their products, and from increased demand for those products, a heady and lucrative combination.
Mr Conlon said it is a more than reasonable expectation that CSL will be able to raise prices in the short to medium term as demand is strong and supply tight.
Mind the gap
However, he says, an attractive short term price environment goes little way to justifying the $70 billion gap between current market pricing and a sensible 12.5 times multiple on the $3 billion of profit arising from decades of hard work, astute decisions and strong management.
Mr Conlon concludes by saying that adding sustainable profit which doesn’t stem from price gouging is hard.
CSL shares may look attractive given the 11 per cent fall from their recent peak. But all that does is bring them back to the level they traded at before releasing largely in-line results in mid-August, a price at which they also looked over-valued.
It looks like a case of buyer beware for CSL at these still elevated share prices.
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