CSL Limited (ASX: CSL) and ResMed Inc. (ASX: RMD) have been relentless in their outperformance of the S&P/ASX 200 (INDEXASX:XJO). In just this year alone, the CSL share price is up an astonishing 44%, while the ResMed share price is up 30%. Who said large-cap, blue-chip shares can’t deliver big returns?
What about valuation?
Both shares are trading at similar price-to-earnings ratio of approximately 40, while forecasting low-mid teens growth for FY20. At face value, the shares do appear expensive and there could be a mismatch between their growth forecast and current valuations.
But CSL and ResMed aren’t quite the same growth stories as A2 Milk Company Ltd (ASX: A2M), Afterpay Touch Group Ltd (ASX: APT), or any WAAAX stock for that matter. They’re not reshaping the wheel or delivering astronomical growth (with some degree of execution risk). However, these companies have justified a heavy price tag by delivering consistent and reliable results that aren’t unhinged by any macroeconomic, geopolitical and/or sector-related noise.
Pulling up the compound annual growth rate (CAGR) of CSL and ResMed, the businesses have grown their revenues at a CAGR of 13.8% and 14.3%, respectively, across the last 6 years. While those numbers may not sound explosive, they are still enough to more than double revenue figures.
Will the growth continue in FY20?
In CSL’s full year report, it cited that FY20 net profit after tax is anticipated to be in the range of approximately $2,050 million to $2,110 million, representing a growth over FY19 of approximately 7–10%. This growth also takes into account the one-off financial headwind of transitioning to a new model of direct distribution in China. The new model is expected to reduce sales by approximately $340–$370 million. If this headwind was excluded, FY20 net profit after tax would be greater than 20%.
ResMed provided the market with a first quarter update on 25 October. It highlighted a 16% increase in revenue and a 19% increase in net operating profit. The company continues to aim for double-digit growth at the bottom line.
It is very challenging to look at the CSL and ResMed price charts and say with conviction that now is a time to buy. While the share prices look extended and almost vertical, the positivity out of the US–China trade talks are continuing to bolster the general equity markets.
CSL and ResMed are excellent businesses to buy and hold for the long term. However, they do not currently suit my risk/reward when they have run up so much in recent times.
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Lina Lim has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia has recommended ResMed Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.
The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2019