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Top broker says Ansell’s share price has peaked as it marches to record

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There are several things going in Ansell Limited (ASX: ANN) favour, including the coronavirus, but this isn’t enough to keep the glove maker in Citigroup’s good books.

The broker downgraded the stock to “neutral” from “buy” following the company’s half year results announcement, although that hasn’t dented enthusiasm for Ansell.

The Ansell share price jumped 2.2% to $32.13 during lunch time trade, which is within striking distance to its $32.63 record high that it hit two weeks ago.

In contrast, the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index is trading 0.2% in the black at the time of writing.

Worth paying a premium for

The latest half year results aside, investors are drawn to stocks like Ansell for its defensive growth potential. Companies like Ansell, packaging group AMCOR PLC/IDR UNRESTR (ASX: AMC) and blood products maker CSL Limited (ASX: CSL) don’t only offer decent growth in this low-growth environment, but their earnings aren’t as vulnerable to economic swings.

Investors are happy to pay a premium for this reassurance, particularly when there’s so much uncertainty about the impact of the coronavirus outbreak on the global economy.

Speaking about the virus, the pathogen is a boon for Ansell as it will drive up demand for its gloves and masks. That’s probably another reason why the stock continues to be sort after by investors.

Coronavirus a positive or negative?

But Citigroup warns that this could be a furphy.

“While the coronavirus increases demand for ANN’s protective healthcare equipment, it could also have broader negative impacts on demand due to potential manufacturing sector plant shutdowns,” said the broker.

“The net impact is expected to be minimal at this time, but this is impossible to predict with certainty.”

Growth could stall in 2H

This isn’t the only uncertainty clouding over the stock. Investors shouldn’t bank on the company delivering growth in the second half of the financial year either.

Management’s FY20 earnings per share (EPS) guidance of 112 US cents to 122 US cents is a wide range and it reflects the company’s lack of confidence in predicting what’s coming down the line.

If the results come in at the low end of the range, it will translate to a 6% drop in 2HFY20 EPS. At the top end, it will mean a 9% increase over the same time last year. Consensus forecasts is pegging FY20 EPS at 116.5 US cents.

Not worth banking on?

Given the level of uncertainty over how Ansell might perform over the coming months and the fact that the Ansell share price is up 29% over the past year, Citigroup doesn’t think it deserves to be on the “buy” list anymore.

Citigroup’s price target on the stock is $32.00 a share.

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Returns as of 6th October 2020

Brendon Lau has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia has recommended Amcor Limited and Ansell Ltd. 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 Scott Phillips.

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