Ansell Limited: Blue-chip stock of the week

When it comes to identifying outstanding businesses such as Ansell Limited (ASX: ANN), one of the key factors to consider is a firm’s ability to maintain a sustainable competitive advantage which can help to defend its earnings power far into the future.

There are some good reasons to think Ansell meets these criteria. As a manufacturer of fast moving consumer goods (FMCG) Ansell has successfully built strong brand power amongst its customers in a number of regions around the world. This combination of recurring sales, brand names and the ability to be a low cost manufacturer of a value added product is exactly the reason Warren Buffett has often been attracted to the FMCG sector.

Ansell also continues to innovate to keep ahead of competitors. One recent example of this is its licensing agreement with Starpharma Holdings Limited (ASX: SPL) which gives it the exclusive right to sell a value-added product in many regions.

Solid double-digit growth

There are two positives which stand out about Ansell at present. Firstly the company is forecast to grow at a solid rate. In FY 2013 the firm earned 104.2 cents per share (cps), in FY 2014 earnings per share (EPS) are forecast to increase to 115.7 cps, and in FY 2015 to 133.5 cps. In comparison, another high quality blue-chip company Woolworths Limited (ASX: WOW) will struggle to average 5% growth in EPS according to forecasts by Morningstar research.

Appealing valuation

Secondly, the higher growth rate of Ansell could reasonably be expected to result in a higher multiple ascribed to the company’s earnings, however based on consensus forecasts for FY 2015, Ansell is trading on a price-to-earnings (PE) multiple of just 14.2. In comparison, Woolworths is trading on 17.6. While a valuation of Ansell does need to take into consideration the lack of franking attached to its earnings and its exposure to foreign currencies which can lead to more volatile earnings, expectations of solid growth makes Ansell’s current pricing worthy of close investor attention.

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Motley Fool contributor Tim McArthur does not own shares in any of the companies mentioned in this article.

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