It will hardly come as a surprise to many that shares in Ansell Limited (ASX: ANN) have surged 63% since they bottomed out at $21.43 in March. The manufacturer of personal protective equipment (PPE) and healthcare products is one of only a handful of S&P/ASX200 Index (ASX:XJO) companies that have benefited from the challenging COVID-19 environment.
Having seen Ansell's share price reach an all-time high of $35.07 earlier today, many prospective investors may be wondering if they've missed this buying opportunity.
Here are a few reasons I believe the Ansell share price may have its best days ahead yet.
Unprecedented demand for healthcare products
The operations of manufacturing companies are currently being strained to meet unprecedented global demand for healthcare safety products. Reflecting this trend, on 3 March the World Health Organization (WHO) called on governments and industry to increase manufacturing by 40% to adequately meet demand for medical equipment. Based on WHO modelling, it is estimated that a mammoth 76 million disposable gloves will be required each month for the foreseeable future as an essential part of the global COVID-19 response.
In its business update to the market on 30 March, Ansell confirmed it had upscaled its production of hand and body protection products, including single and multi-use surgical gloves. Healthcare production normally accounts for 52% of total company revenue. However, this figure is set to increase as demand for industrial products (48% of total revenue) weakens due to coronavirus factory closures. The company commented:
The Ansell teams are working tirelessly to maximize output including making selective investments in new capacity and by leveraging manufacturing locations that are not affected and we expect to be able to continue to ship large quantities of product to key markets.
The market has undoubtedly priced the current demand for PPE into the Ansell share price. Despite this, I believe the sheer volume of demand for its healthcare products will allow the company to outperform market expectations when it reports its full year FY20 results in August this year.
Robust working capital
A key metric of a company's short-term liquidity, defined as the ability for a business to meet its day-to-day financial obligations, is working capital. Many investors commonly use the current ratio (current assets divided by current liabilities) to calculate working capital.
As seen from Ansell's balance sheet as of 18 February, the company has a current ratio of 2.91. This means that Ansell has the necessary funds to meet all of its short-term payments almost 3 times over. It also highlights the strength of Ansell to withstand the challenging current economic environment.
Furthermore, in its COVID-19 business update, Ansell re-affirmed its FY20 earnings guidance of US$112c to 122c earnings per share. It also confirmed it had $500 million in cash reserves with no significant debt obligations for the next 12 months. This robust financial position may also afford the company some flexibility to boost its inventory, sales or staff volumes to reflect the upsurge in demand for its healthcare products.
Notably, Ansell's high working capital suggests the company is efficiency managed and well-positioned for increased growth for the remainder of FY20 and beyond. This is a positive sign for prospective investors that the company share price may not have yet peaked.
Social implications of COVID-19
Many believe the current relentless demand for PPE and health products will persist beyond a widely available COVID-19 vaccine. It is hypothesised that industries will be forced to implement rigorous new OH&S standards, the use of gloves and masks will become commonplace for consumer-facing businesses. More broadly, caution toward superior hygiene will be embedded in societies.
Even if there is only a fraction of truth to this outlook, the increased daily demand for Ansell's healthcare products creates a significant opportunity for prospective investors. As a manufacturer, Ansell relies on economies of scale to increase its profits. With the enlarged volumes of gloves and other PPE expected to be produced and distributed over the next 3–5 years, Ansell shareholders are likely to primarily benefit from wider profit margins and improved earnings growth.
Foolish takeaway
Having risen steeply in the past month, the Ansell share price appears likely to remain near the $35.00 mark for the foreseeable future. Yet, due to Ansell's strong financial position and the continuing demand for its niche range of health and PPE products, I believe there remains significant upside for investors still looking to add this company to their portfolio.
