Ann: Appendix 4D and Half Year Accounts, page-22

"Hi Adam,
I wonder if you are able to suggest what will be a reasonable entry price for someone who never held CSL before? I still do not believe why I did not buy it when it nearly touched $100 an Year or two ago. While it may never go that down but is it a reasonable value below 170?"

As you might know, I am a mad keen fan of this company and consider it to be the best quality ASX-listed company, for a host of reasons.

But I would not buy CSL at the current price, despite it being a truly wonderful business.

The reason lies in the investing adage of:

"Quality is what you buy; Value is what you get."

And in CSL's case, you are buying quality in spades, but at the current valuation multiple of around 30 times [*], you aren't getting much value.

[*] It warrants mentioning that CSL's earnings a significantly understated given the company expenses all of its ~US$800m of R&D expenditure. And $800m is highly significant in the context of a Pre-Tax Profit figure of around US$2.5bn. It stands to reason that, if CSL capitalised, say, half of its R&D spend (which the majority of other companies in CSL's situation would do), the company's Pre-Tax Profit would rise by a full one-third and the ensuing P/E multiple would be closer to 23 times which, while not 30 times, is still not cheap.

There is precious little valuation buffer or margin of safety inherent in the current stock price.

In my experience, every 4 or 5 years some extraneous factor - could be a regulatory scare, a trial that disappoints, the A$ strengthening, weaker-than-expected guidance or a financial market crisis - which causes CSL's share price to fall dramatically to a level that makes it attractive enough to buy.

My Rule of Thumb, which has served me well with CSL, is that I add to my holdings in the stock every time the "raw" P/E multiple falls below 25 times (i.e., when the P/E multiple, adjusted for excess R&D expense, falls to 17x or 18x.

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