Despite the CSL Limited (ASX: CSL) share price being down 17% from its all-time highs, it still remains one of Australia’s greatest ASX success stories.
Headquartered in Melbourne, CSL has become a global biotech company by focussing on “saving lives and protecting the health of people who were stricken with a range of serious and chronic medical conditions”. This focus has led the company’s share price to grow at an annualised rate of 19.3% over the last decade, excluding its growing dividend.
The company has a number of products on the market, however its core product is its blood plasma collection business. Analysts believe that this business can grow by high single digits for the foreseeable future. Because of this robust growth the company is aiming to open between 30 to 35 new collection centres this financial year.
CSL currently has five new products moving into human clinical trials. The company has a strong history of investing in research and development (R&D), in order to generate a diverse and growing revenue base. At 31 December 2018, CSL spent 8.7% of total operating revenue on R&D.
A financial key
One of the keys to CSL’s share price success is the exceptional 42% return-on-equity (RoE) that it generates. This is possible because the company has used debt to leverage its assets. Without this debt the RoE would be a more moderate 16%.
By historical measures the cost of borrowing has been extremely low for a number of years now. This has enabled companies like CSL to use debt to fund some of their growth. One benefit that CSL has over other companies is that its products are less cyclical and it has strong cash flows. This enables the company to service its interest payments.
For FY19 CSL is targeting the upper end of its full year profit guidance. This would represent 13% year on year growth to between US$1,880 million and US$1,950 million. Shares currently trade around 32x estimated forward earnings and offer an unfranked dividend yield of 1%.
Foolish bottom line
Although CSL trades on a rich valuation compared to its current earnings growth, the strong track record and long term prospects of the company are sound. I’d like to buy shares cheaper than they are today, however it is important to note that high quality companies like CSL generally trade at a premium.
If you like the sound of CSL, here are some other high quality growth companies.
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Lloyd Prout 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 no position in any of the stocks mentioned. 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