In recent months, the U.S. dollar (USD) has been rising at the fastest pace in 40 years, according to Citibank. A soaring USD involuntarily inflates the price, and thereby, reduces the demand for U.S. exports.
A classic example is Ansell Limited (ASX: ANN). On 10 August 2015, the company announced that the benefit of its hedging program, which largely offset the impact from fiscal 2015's currency movements, is expected to diminish in fiscal 2016.
Ansell is a global leader in premium quality protective and medical gloves, as well as condoms. With the strength of a worldwide network, Ansell can exploit economy of scale greater than any other competitors. This is evident from its high earnings before interest and tax margin of 14.9% for fiscal 2015, compared to the industry average. However, its global market is subject to currency headwinds, which Ansell is currently facing.
In consideration of currency fluctuations, Ansell forecast a fall of up to 14.3% in earnings per share for financial year 2016. Investors reacted to the disappointing outlook with huge sell-off, pushing the stock down 15.8% on 10 August 2015.
However, Ansell has improved its long-term outlook by expanding its product development and manufacturing facility to Sri Lanka, a low labour cost country, in addition to its existing facilities in Malaysia, Mexico and North America. This is expected to further reduce its manufacturing costs.
Ansell has also reported considerable growth in its global brands, which include Hyflex, Gammex, Barrier Safe and SKYN. Ansell Vice President Carol Carrozza stated that research has shown users prefer SKYN over latex, with a 97% satisfaction rate. As its brand equity increases and Ansell further distinguishes its offerings from the competitors, it paves the way for future releases of premium priced products.
A reduction in manufacturing cost and a potential for premium pricing would mean a higher profit margin for Ansell. However, the short-term outlook is still unfavourable. Substantial shareholders of Ansell, such as Perpetual Limited (ASX: PPT) and WAM Capital severely reduced their holdings early this year.
Foolish takeaway
Only time will tell as to when conditions will improve. For the time being, investors should closely monitor the U.S. dollar, as well as future releases of premium priced products from Ansell. With these indicators, investors could better gauge the outlook of Ansell. I believe it is a great opportunity for investors to accumulate Ansell shares at the current price of $21.09.
