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Ishan Majumdar
Ishan Majumdar
Articles (98)  | Author's Website |

These PPE Companies Are Gaining Momentum

The Covid-19 pandemic has resulted in increased use of gloves and masks, giving the PPE industry a strong boost

April 21, 2020 | About:

One of the biggest beneficiaries of the Covid-19 pandemic is the personal protective equipment industry. PPE companies manufacture and distribute different kinds of safety gear for personal protection, such as gloves and surgical masks, which are meant for protecting users against the risk of contracting a virus, inhaling sawdust, cutting your fingers or other occupational hazards.

As per the guidelines of the World Health Organization, people are recommended to wear surgical masks whenever they leave their homes in order to protect themselves from contracting Covid-19. The fact that these guidelines are being followed aggressively all over the world has raised the outlook for manufacturers of PPE, and many of these companies have seen their stock prices zooming.

PPE macro

As per a report by Global Marget Insights attempting to value this industry, PPE had a global market size of $47.97 billion in 2018 and was forecasted to grow at an annualized rate of 7% until 2025. The forecasted size of this industry as per the report is predicted to reach $79.68 billion by 2025.

However, this does not take into account the pandemic upside that PPE companies are witnessing today. This industry also has strong entry barriers, as most PPE products are required to go through a string of regulatory approvals before being launched in the market. Overall, this is definitely a hot sector. A number of listed companies are already benefitting from the highly positive outlook for PPE. However, there are some players which still have a considerable upside yet to be achieved.

Yunhong CTI

Yunhong CTI Ltd. (NASDAQ:CTIB) was recently in the news for the change of its name from CTI Industries. The company is a big player within the rubber and plastic market and is a known producer of custom film products, foil and latex novelty balloons and flexible packaging products.

There has been strong speculation that the company will pivot its operations from latex balloons to latex gloves to cater to the rising demand for these products. A strategic change in operations is a distinct possibility after Chinese businessman Yubao Li joined the company’s Board of Directors earlier in January 2020. In fact, Li has actually increased his skin in the game by purchasing about 1.3 million shares at about $1 per share at a time when the price was below the $1 mark. This has certainly inspired investor confidence, and the share price has started climbing up.

It must be noted that Yunhong CTI has a very small free float, so an excess demand could well result in the price shooting up owing to a short squeeze.

Owens & Minor 

As one can see in the chart above, Owens & Minor’s (NYSE:OMI) downward trajectory has seen a strong reversal post the Covid-19 outbreak. A provider of various consumable healthcare supplies, including surgical masks to the healthcare market, the company is currently trading at a price-sales ratio of 0.05, which is well below the industry average.

In a recent interview with Jim Cramer, the company’s CEO Ed Pesicka stated that on average, a typical hospital uses 10,000 to 20,000 surgical masks each week, a number which has now grown to between 200,000 and 300,000 masks per week. This implies a strong demand for the company’s products and excellent scope for multiple expansion.

It is worth highlighting that Owens & Minors is a profitable company with a positive operating margin of 1.12%, and it trades at a low Enterprise-Value-to-Ebitda ratio of 9.14.

Takeaways

Even a mega cap like Amazon (NASDAQ:AMZN) has witnessed a surge in the orders of masks, gloves and other forms of protective equipment, which is one of the many reasons why its stock has soared above the $2,000 mark.

Overall, I think the PPE space has a number of compelling investment opportunites that deserve to be evaluated for a medium-to-long-term investment, not just short-term plays.

Disclosure: No positions.

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About the author:

Ishan Majumdar
I am a qualified Chartered Accountant with a Masters in Management (Grande Ecole) from HEC Paris. I run a proprietary boutique financial advisory firm called Baptista Research (www.baptistaresearch.com) specializing in M&A, corporate advisory, equity research and valuation of listed companies.

I have nearly a decade of experience spread across investment banks, financial advisory firms, investment funds and other corporates in many different geographies, such as France, Spain, India and others. I was a part of the LBO Financing team at BNP Paribas where I worked on deals with a combined enterprise value of over $1 billion. I have also worked in mergers and acquisitions with Credit Agricole CIB and corporate strategy with Groupe Danone SA. Over the years, I have developed a strong specialization in corporate valuations, strategy and financial analysis.

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