"Thanks, but there might be one key difference.
Will the next decade be the same as the last decade. ie a decade of lower and lower interest rates, of MMP (modern monetary policy, with central banks buying debt to force down interest rates), of a decade end of zero or negative interest rates.????? If not, then the risk free return comes into play.
Notice that when the risk free return was a decent rate (as reflected by 10yr government bonds), say 3-4%, then the corresponding PE of CSL was lower. "
Fair enough, but if one want to play the compare-then-with-now game, then one needs to do it properly:
The current T-10 yield is back at 2007/2008 levels.
But CSL is a totally different company today compared to the then, in several respects:
1.) CSL had just acquired Aventis Behring (in 2004 or 2005, I think) which a decade later proved to be a transformational transaction and changed the entire industry structure. But back in 2007/2008 CSL was still only integrating Behring and the benefits in terms of gross profit margin and financial returns accretion were not yet evident at that stage.
2.) Difference in global scale: Revenue in 2007/2008 was around A$3.5bn (A$ was the functional currency at the time). Today CSL is a US$13.3bn (so A$20bn equivalent) Revenue company.
3.) Global reach and product diversification: Through both acquisition and internal development, CSL has a great many more product streams today than it did back in the early 2000s. And that hasn't come at the expense of GP Margin being sacrificed, which often happens during diversification: CSL's GP Margin is today well over 50%; in 2007 and 2008 it was just 45%.
4.) Fifteen years have lapsed; so that's 15 years of top-notch operating and financial track record, and demonstration of astute capital allocation discipline and risk management. That capital market "goodwill" that has been created in the interim period needs to be factored into the market's perception of the company and hence, its valuation multiple, today.
So to compare "CSL-'23 with CSL-'08 is to compare fish with fowl; CSL is objectively a more prolific business today, which should naturally be reflected in its valuation multiple.
(As for applying the Capital Asset Pricing Model's risk-free rate plus a risk premium to derive a theoretical earnings yield, the problem with that is that while it works fine in the lecture theatre, it hasn't been evident in practice for just about my entire investing career (and I'm no longer youthful!). For example, CAPM says the market multiple should probably average around 14x across the equity market cycle. My clear sense is that the market spends 95% of the time well above that level. In fact, the only time it seems to adhere to CAPM is during bouts of exogenous shock, eg. Iraq War, GFC, Greek debt crisis, Covid. Heck, I'd be surprised if they even still taught it at finance schools.)
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