Why there could be more pain to come for Ansell Limited shares

Shares of glove and condom manufacturer Ansell Limited (ASX: ANN) were crushed on Thursday, losing 20.6% of their market value to end the session at just $14.80. It was their lowest price in nearly three years and analysts are warning there could be even more pain ahead.

Source: ASX website; Ansell's one-year price chart

Source: ASX website; Ansell’s one-year price chart

Indeed, yesterday’s collapse was sparked by a significant full-year profit downgrade issued by the company on Wednesday evening. In the lead-up to its half-year earnings presentation on Monday, Ansell told investors to expect earnings per share (EPS) to be between US$0.95 and US$1.10 per share for financial year 2016 (FY16).

The mid-point represents an 8.9% downgrade compared to previous EPS guidance of US$1.05 and US$1.20 per share, which was given in August 2015.

In terms of why Ansell downgraded its full-year earnings guidance, the company stated that sales had slowed more quickly than anticipated in January “as customers deferred or reduced orders to adjust inventory levels amid a general weakening of the external economic environment.

Economies around the world have certainly been volatile since the beginning of the year as a result of fears of a major slowdown in China’s economic expansion, together with collapsing oil prices. The problem is, the volatility isn’t expected to subside anytime soon which casts a cloud over Ansell’s ability to forecast its future performance.

This is made even more difficult by the uncertainty created by fluctuating exchange rates, given that the company generates roughly 93% of its revenues from foreign markets, according to data from Capital IQ. At this point, it expects sales for the first-half to be 7% lower than in the prior corresponding period, but on par with last year’s results after adjusting for currency changes.

The company said it expects a stronger performance in the second-half (the period ending 30 June 2016) based on factors such as lower raw material prices and additional benefits from price increases in EMEA (Europe, Middle East and Africa), but this may well be offset by further turbulence in the wider economy.

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Motley Fool contributor Ryan Newman has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. You can follow Ryan on Twitter @ASXvalueinvest.

The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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