The CSL Limited (ASX: CSL) share price is close to a 52-week low. Could that mean it’s a buying opportunity?
CSL is one of Australia’s biggest businesses. It is a major blood plasma business and it also manufactures and distributes various vaccines.
Why hasn’t CSL been performing?
There isn’t one clear answer. You’d have to ask the buyers and sellers why they have been transacting at the prices they have for the best answer about today’s share price.
But I do have a couple of guesses.
The first relates to the foreign currency exchange. CSL reports its profit and makes a lot of its earnings in US dollars. The Australian dollar has strengthened substantially – more than 10% – against the US dollar over the past year. This makes CSL’s earnings worth less in Australian dollar terms, which is what we see on the ASX with the CSL share price.
My other guess is that CSL is actually quite pricey, despite the share price not moving much. It’s projecting that its profit for FY21 is going to grow in the range of 3% to 8% to US$2.17 billion to $2.265 billion. Using the earnings projection on CommSec, CSL is valued at 41 times the estimated earnings for the 2021 financial year.
A price/earnings ratio of more than 40 is very high for a business that’s growing profit in the single digits.
You could argue that if the exchange rate was what it was a year ago then the CSL share price could be more than 10% higher.
There are also some investors that think that CSL could lose market share to new technology.
Can CSL get back to good returns?
CSL has had a couple of setbacks. It had to cancel the vaccine that it was working on with the University of Queensland. COVID-19 causing some minor difficulties in the US relating to its plasma business.
However, healthcare will continue to play an important part in our society. Indeed, CSL’s role could become even more important in the foreseeable future as governments seek to protect populations from COVID-19. There could be greater demand for the regular flu jab as well.
CSL is also going to build a large vaccine manufacturing centre which could help with margins in the future.
Despite the high price, I’d rather own CSL shares than most other ASX 20 shares. I believe healthcare spending will continue to increase. And CSL continues to invest in R&D which could lead to new earnings streams for the company. If you remove the R&D spending from CSL’s earnings, then its valuation doesn’t look as bad, but the research and development is necessary to maintain and improve its global market position.
However, there are smaller ASX growth shares in the healthcare space that I think have better long term growth potential like Volpara Health Technologies Ltd (ASX: VHT).
