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A bargain hunter’s guide to Ansell Limited

Healthcare stocks have been a great way to crush the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) over the last year and I am a big fan of many of the bigger, globally diversified companies which make up the S&P/ASX 200 Health Care Index (Index: ASX: XHJ).

Protective glove and condom maker Ansell Limited (ASX: ANN) is included in the index ranks, but does it make a good investment today?

Dangerously cheap

Selling for just 13x trailing earnings, Ansell is one of the cheapest companies in the Health Care Index which has an average price of 23x earnings.

This looks comparatively cheap, but it’s cheap for a reason. Ansell is a mature company and has been struggling with sales in several of its key markets. The short-term outlook is bleak and the company has downgraded its full year 2016 earnings per share guidance by about 9% compared to 2015.

It would be one of the few companies in the growing health sector to have a disappointing outlook, but it reflects a bigger problem which investors should be alert to: competition.

Protective gloves and condoms are not especially difficult for competitors to replicate and competition limits sales growth as well as product margins. Ansell’s medical division, where one would expect to see decent growth given the global healthcare trend, has been struggling. It makes up 25% of the company’s revenue, but revenue fell in the first half of the 2016 financial year.

As a result of market pressure Ansell struggles to live up to the mammoth returns on equity (ROE) that other health care companies claim. Ansell made a 16% ROE for the 2015 financial year, but compare that to the monster 51% ROE produced by CSL Limited (ASX: CSL), or 41% generated by Cochlear Limited (ASX: COH).

If Ansell was swimming in equity, with little or no debt this might be appealing. But at 31 December 2015, Ansell had a debt-to-equity ratio of a tick over 1x which means the company is equally financed by debt and shareholder equity. Operating at a lower ROE means less margin of safety for paying back debt if competition grows or sales ebb further.

Should you buy Ansell today?

Although globally diversified and comparatively cheap, in my view Ansell is not nearly as appealing as other listed healthcare companies like CSL or Cochlear. These companies have more sustainable market positions which can be leveraged to churn out huge returns for investors.

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Motley Fool contributor Regan Pearson has no position in any stocks mentioned. 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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