Deutsche Bank has upgraded Ansell Limited (ASX: ANN) to a “buy” with a 12-month price target of $22 a share. Ansell shares are currently trading at $20. Analysts at Deutsche Bank stated that:
“Despite a frustratingly slow economic recovery and a weak first-half result, we believe Ansell is on track to deliver a FY14 result within its guidance range, thanks to materially weaker input costs and stable selling prices”.
I agree with the above analyst recommendation. Ansell’s share price should outperform as a result of the following:
1) Ansell has provided the market with guidance that it expects to deliver 15% second-half FY14 net profit growth which implies a forward price earnings ratio of 15 times. Therefore, at this price the stock looks cheap, especially when compared to other industrial companies on the ASX.
2) Ansell’s margins will continue to improve as a result of record-low commodity prices. Ansell stated that latex prices fell by 16% in the second half of FY14 and average nitrile pricing was down by 14%. The continued weakness in commodity prices will result in significant cost savings for Ansell for FY14 and FY15.
3) Ansell will continue to benefit from improving economic conditions in the United States. The United States reported impressive employment data in April which is a catalyst for an improvement in industrial conditions. Ansell derives 45% of its industrial earnings from the United States.
Ansell currently appears cheap based on the company’s guidance. Furthermore, it is highly likely that earnings will be higher than forecast as a result of a robust US economy and record low commodity prices.