Could the shares of glove and condom manufacturer Ansell Limited (ASX: ANN) be an attractive buying opportunity today?
With the share price of Ansell down around 10% over the past year but the underlying business operations appearing in reasonably good health, there are a number of reasons to suggest that an opportunity is indeed present…
1. Emerging Market exposure
Ansell has successfully expanded its reach into emerging markets (EM) over the past five years. This growth has led to a near doubling in the revenue contributed from EM between financial year (FY) 2010 and FY 2015 and also an increase in the percentage of group sales coming from EM with a rise from 17% to 24%.
2. Diversified sales
Ansell operates across three business units namely:
- Industrial – as an example rubber gloves for handling chemicals
- Healthcare – such as disposable surgical gloves
- Sexual Wellness – condoms
This diversity offers shareholders a degree of earnings protection thanks to not just regional diversification but also customer and industry diversification as well. In this respect, Ansell is comparable to other leading defensive industrial stocks such as Brambles Limited (ASX: BXB) and Amcor Limited (ASX: AMC).
3. High margin operations
Despite being negatively affected by exchange rate movements in the six months to 31 December 2015, Ansell still achieved soliddouble-digitt earnings before interest and tax (EBIT) to sales margins.
These margins ranged from 11.1% in the group's Industrial division to 20.9% in the Single use division. The group margin was 12.7%, down from 14% in the prior corresponding half.
4. Strong balance sheet
Ansell's net debt position at December 31 stood at around $490 million. Given shareholder funds were approximately $1.6 billion, the balance sheet looks to be in good order.
Likewise, in terms of servicing Ansell's debt, the net debt to EBITDA ratio looked comfortable at 1.9 times.
Foolish Takeaway
In recent times Ansell has faced a double whammy of difficult global economic conditions particularly in the oil, gas, mining, chemical, mechanical and engineering and automotive sectors which account for approximately 42% of group revenue.
Likewise, exchange rate movements have negatively impacted the group – a factor largely outside of its control.
Although management downgraded its full year guidance, it would appear that FY 2016 is shaping up to be a "reset" year for earnings. According to analyst consensus estimates provided by Reuters earnings per share should be flat over FY 2016 and FY 2017.
Ansell is scheduled to report its full year results on August 15 and these results are likely to be closely scrutinised. While the near term performance of the company is under some stresses, in my opinion the longer term outlook remains positive.
Having produced a total shareholder return of 10.2% per annum over the past decade and trading on a forecast price-to-earnings multiple of around 15 times, the stock is arguably attractively priced compared to the average multiple of the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO).
