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Ansell Growing Through M&A

- By Holmes Osborne, CFA

Ansell Ltd. (ANN.AX)(ANSLF)(ANSLY) is an Australian manufacturer of rubber gloves. The company's first-half results did not meet expectations, but it has a lot of cash to deploy in mergers and acquisitions, management is cutting costs and the stock pays a nice dividend. The stock is a buy.

Ansell is a company in motion. It sold its condom division and is reinvesting into new businesses. What will the company look like in five years? That is not 100% clear, but is probably why the stock is on sale. If management is smart about mergers and acquisitions, can cut costs and keep increasing the dividend, it should drive the stock price higher.


The stock trades for about $17.90. The market cap is $2.4 billion. The forward dividend is about 47 cents, so the dividend yield is 2.63%. Management's guidance (on the low end) for earnings per share in 2019 is $1.06, giving the stock a price-earnings ratio of 16.7 -- not a bad valuation.

Sales from continuing operations were up slightly by 0.4% to $725.3 million for the first half of 2019. Earnings before interest and taxes were down 4.7% to $60.7 million. Adjusted earnings per share were up 6.2% to 46.1 cents. The dividend increased 1.2% to 20.75 cents.

Actual profits, not adjusted, were down 40.7% to $39.5 million. Higher commodity prices and the shutting and opening of factories led to higher costs. Two factories were closed while new factories were opened in Vietnam, Sri Lanka and Malaysia. Ansell recently completed a $265 million stock buyback plan, which was very shareholder-friendly. Moody's upgraded the company's debt.

2019 guidance calls for earnings per share ranging from $1.06 to $1.12. Management expects price increases, fewer shares after the buyback and cost savings to allow the company to have a better second half.

Ansell started out as the Australian division of Dunlop Tyres. The U.S. accounts for 44% of sales, Latin America makes up 7%, Europe, the Middle East and Africa contributes 37%, Asia gives 8% and Australia provides the remaining 4%. The health care division accounts for 52% of sales and the industrial division contributes 48%. There used to be a condom division, but it was sold off last year. Some of Ansell's brand names include: HyFlex, Gammez, AlphaTec and Micro Flex.

Ansell is a pretty simple company to understand: it makes rubber gloves, safety goggles and hazmat suits. Raw materials account for 35% of costs. Nitrile was 15% higher in the first half, but the cost of rubber was down.

CEO Magnus Nicolin blamed its weakness in sales in Germany on decreased buying from China. The major auto manufacturers account for much of Ansell's sales in Germany. It's always amazing how the economics of one country can send a ripple effect across the globe. Nicolin also said the company is looking at three or four acquisitions. It is likely looking to take the cash from the sale of its condom division and reinvest into new glove companies. Ansell recently bought U.S.-based Ringer Gloves for $70 million.

Morgan Stanley has a price target of 27 Australian dollars ($19.27). It lists key drivers of the stock as strength of global manufacturing, the company's solid presence in gloves, favorable pricing for rubber and latex and a strong balance sheet. Morgan Stanley notes the earnings consensus for this year is $1.05, in line with what the company is guiding.

The Australian tax man will take back some of the dividend from shareholders, but I believe New Zealanders and Australians don't pay taxes on dividends from home country stocks.

I like Ansell. We bought it on Feb. 8, 2018 and are down a little over 9%, not counting the dividends. Regardless, I would still recommend the stock. The company will continue to grow through mergers and acquisitions and if management can cut costs, this should eventually buoy the stock. In the meantime, investors can collect a nice little dividend for their patience.

Disclosure: We own shares.

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This article first appeared on GuruFocus.