Have we passed peak optimism for CSL?

Being negative (arguably) Australia’s greatest success story yields few friends – and that stance over the past ~7 years has been the wrong one. To be clear, I haven’t owned CSL over the long term, I’ve traded it -  profitably - but missed the really juicy moves that have played out.  

I find it much more compelling to listen to someone who’s had great success investing in a company, they describe it better, they sell the dream more vividly, however ultimately that can also come at the cost of objectivity.

Today, I’ll look at CSL in a fairly simplistic, objective light, which could be dangerous but as we saw with the stock move yesterday (-3.92%), the market was positioned for more out of the result. 

Three Key Takeaways 

• The result was broadly in line with market expectations overall and they tightened forward guidance to the upper end of the previously guided range of $1.88bn to $1.95bn. The composition was slightly skewed divisionally, top line revenue was a tad light v expectations (about ~2%) and there was a slight miss for the half year NPAT which came in at $1.16bn v the market at $1.18bn. There were reasons for it, but it’s still on the lighter side of the ledger. 
• This is a growth stock, so growth metrics are key. Sales revenue was up ~9% and EPS was up 7%. The forward guidance provided by the company has seen the market downgrade full year earnings estimates by a smidgen, with consensus now sitting at $1.92b versus $1.94bn pre-result – that is a rare event.

Going into the result, I think the market was clearly positioned for an upgrade, and it didn’t happen.
 

• Guidance now implies earnings growth of 11% for the full year, coming off the back of 30% growth in 2018. Looking ahead, the market is sitting at between 11-12% consistent growth each year out to 2022. 

 
What the market is missing 

Up until December 2015, CSL consistently traded on around 20 times earnings. From then on, we’ve seen exceptional earnings growth and delivery from the company and the market has happily paid up for it reaching a crescendo in early September 2018 where someone paid 37.4x for the stock. The average over the past 5 years is 25.7x and today the stock is trading on a 1 year forward P/E of 31.08 dropping to 27.65x in 2020 and 24.78x in 2021 if they meet consensus earnings numbers. 

When the business was growing at 30%, as it did last year, paying nearly 40x probably made sense as long as the 30% growth would continue, which it hasn’t. This is a maturing business – it’s one of the highest quality – some might say an A1 sort of business however in my view, you’ll be able to buy the stock cheaper in the months ahead. 

CSL seems to be entering a transition period as it cycles off the top of peak optimism. Believe me, this is a business that everyone loves, they feel comfortable in it and its clearly delivered in spades.

Markets / stocks can often move in the direction of most pain and in the case of CSL, this is down.  

While a very simplistic measure, on a P/E of 25.7x which is the its 5 year average, CSL is worth $165.11, rising to $184.92 next year.

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