The Ansell Limited (ASX: ANN) share price took a dive this morning after a leading broker urged investors to dump the shares.
That sent the glove maker's ASX share price crashing over 4% to $32.33 at the time of writing. Adding insult to injury, the Ansell share price is the worst performer on the S&P/ASX 200 Index (Index:^AXJO).
If you are wondering, the Corporate Travel Management Ltd (ASX: CTD) share price is the second worse while the Clinuvel Pharmaceuticals Limited (ASX: CUV) is in third spot.
Ansell share price whacked by broker downgrade
Investors are hitting the "sell" button after Macquarie Group Ltd (ASX: MQG) downgraded the Ansell share price to "underperform".
That may sound counterintuitive as we are still in the midst of the COVID-19 pandemic. Demand for personal protective equipment (PPE) is still strong and that's unlikely to change.
In fact, single-use gloves for examinations (Exam/SU) were Ansell's biggest revenue contributor in FY20. The product accounted for around one-third of group revenue.
From hero to zero?
The item remained a hot product in FY21 but price pressures started to bite and management was able to increase prices to offset the squeeze.
They did such a good job that Macquarie estimates that the price increase was above the extra cost for raw materials.
This pretty much shows the price inelasticity for essential items like PPE during a pandemic!
Victim of its own success
Based on Macquarie's numbers, the price increase added $70 million to Ansell's gross profit in 2HFY21. This equates to around a 60% increase of the year-on-year gross profit improvement in FY21.
But cracks in the Ansell share price growth story have started to appear that prompted the downgrade.
"Recent industry feedback suggests reduced demand and increased supply thinner nitrile Exam/SU gloves, leading to lower ASPs (approaching pre-COVID-19 levels)," said Macquarie.
"In addition, feedback suggests a refocus of supply into other segments (thicker exam/single use, surgical). We now assume weaker volumes for Exam/SU in FY22/23 as well as the reversal of the majority of price increases implemented in FY21."
Ansell share price at risk of consensus downgrades
In other words, the Ansell share price could soon be facing a consensus downgrade cycle, if Macquarie is right.
The broker's FY22 earnings per share (EPS) forecast for Ansell of US$1.70 sits under the low-end of the company's guidance. The guidance is for between US$1.75 and US$1.95 a share.
What is the Ansell share price worth?
Further, Macquarie's FY23 EPS estimate is 16% under consensus. The broker's 12-month price target on the Ansell share price is $32.
At least the shares don't have to fall by much more to reach fair value after today's big sell-off.
