Is CSL’s share price justified?
What makes a share price expensive? With insane valuations now commonplace, UK-listed global asset manager, Schroders, recently addressed this very question, contrasting the fortunes of two of Australia’s biggest companies – CSL (ASX:CSL) and Rio Tinto (ASX:RIO). What they found makes essential reading.
Roger Montgomery is the Founder and Chairman of Montgomery Investment Management. Roger has over three decades of experience in funds management and related activities, including equities analysis, equity and derivatives strategy, trading and stockbroking. Prior to establishing Montgomery, Roger held positions at Ord Minnett Jardine Fleming, BT (Australia) Limited and Merrill Lynch.
This post was contributed by a representative of Montgomery Investment Management Pty Limited (AFSL No. 354564). The principal purpose of this post is to provide factual information and not provide financial product advice. Additionally, the information provided is not intended to provide any recommendation or opinion about any financial product. Any commentary and statements of opinion however may contain general advice only that is prepared without taking into account your personal objectives, financial circumstances or needs. Because of this, before acting on any of the information provided, you should always consider its appropriateness in light of your personal objectives, financial circumstances and needs and should consider seeking independent advice from a financial advisor if necessary before making any decisions. This post specifically excludes personal advice.
Danny
:
When assessing companies like csl & rio that report in US$ (Or any foreign currency) do you just work out an intrinsic value in the stated currency and convert it to Aus$ or do you convert each input to aus$?
Roger Montgomery
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Each approach should produce a similar result but converting the end valuation to Aud probably is easiest.
Debbie Bridges
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I too am watching CSL, at this price is it good to reduce my holdings or sell all CSL Shares, it has done well for me….is there more to be had?
I am hearing it has reached its top?
Thank you David.
Dave Edgelow
:
This is an interesting article Roger – thank you.
Having read Value.Able (twice) I’ve been applying these principles and calculations as best I can. With KGN I cannot find an earnings estimate from which to make a reasonable valuation, and RIO is currently priced below its value (probably has a lot to do with ore price speculation).
However, just over two years ago I was surprised (given the high PE ratio) to find CSL priced under my calculated intrinsic value, and bought in (at $108). I have updated the calculation for FY1718 results (with a required ROE of 10%) and I find the current price ($207) as being close to the mark. I’ve double-checked all my figures and calculations; perhaps my required ROE is low?
A lot of CSL cash flow from established operations is allocated to R&D. If CSL reduced R&D I expect this would free up a lot of cash (but not necessarily a good idea). I guess that evaluating on ROE is assuming that this re-investment (in R&D) will create compounding growth, worth more than a dividend – and perhaps that’s a risk I’m not calculating?
If you applied the formula from Value.Able, instead of comparing PE ratios, does CSL really seem over-priced?
Roger Montgomery
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Its a good question Dave. Of course the output is a function of the assumptions. We cannot get a value near the current price for CSL.
Max Zan
:
Interesting comparison Roger
There is no doubt CSL is expensive based on it’s ” near term ” FCF multiples , but what also needs to be taken into account is the significant R & D Expenditure that is written off as it occurs and is not Capitalised on The Balance Sheet. How much of that R & D Expendiure that has been written over many years converts to higher future Operating Cash Flow and also Free Cash Flow is hard to quantify. Getting “new Drugs and Therapies ” to Market is a very slow, tedious, risky and regulated process, so the money spent on R & D could all be wasted and that explains why it’s written off as it occurs, but on the other hand it could lead to new drugs and therapies being approved that justify the current market price . CSL remains a great Business , but it also has a “speculative R & D component” that currently soaks up a lot of Operating Cash Flow each year which makes it very risky at current prices.