The Avon Protection (LSE: AVON) share price has had a mixed performance during the Covid-19 pandemic. As a global leader in protective clothing and equipment, the shares understandably soared at the beginning of the pandemic as people worried about protecting themselves against the virus. From January 2020 to January 2021, Avon Protection’s share price increased 210% to an all-time high of 4,650p. Since then, however, the share price has been in a well-defined downtrend – it currently sits at 1,070p. While the recent price action is disappointing, I still consider this UK stock an exciting prospect, and the 10% gain today gives me even more hope.
Fundamentally, Avon Protection’s figures are promising. With a compounding annual growth rate of earnings per share of 50.48%, this stock has delivered outstanding results for the past five years. Furthermore, its price to earnings ratio of 11.8 suggests that its share price should be significantly higher than where it is currently. In terms of its products, Avon Protection is the only company in the UK and Europe, and one of two globally, that manufactures equipment for all specialised fields: emergency services, military, biochemical protection, and nuclear. While it produces body armour and hazardous material suits, it also manufactures respirators and helmets. The helmet production was enhanced with the acquisition of US company Team Wendy.
While it has a diverse business, the news is not all good for Avon Protection. Suspicions rose in June 2021 when Berenberg cut the Avon Protection price target from 3,335p to 2,955p. The following August, it was announced that the company’s 2022 revenue guidance was being cut from $357m to $320m-$340m. In the same announcement, however, Avon Protection stated its order book was up 21%, indicating the increasing need for its products. Nonetheless, with the pandemic easing, supply chain issues began to nibble away at the share price. Since then, a major flaw in body armour testing has dented investor confidence and the leadership eventually took the decision to wind down this part of the business over the course of the next two years.
These problems have created a rather interesting chart over the past four months. We can see the first price gap on 13th August and a second, larger gap on 12th November that took place on extremely heavy volume. These gaps both correspond with the negative supply chain and body armour news stories. While the stock is in an unmistakable downtrend, there is a remote possibility that the price is currently in the head position of an inverted head and shoulders formation. This could mean that a price reversal is in progress and the aforementioned gaps could be filled. There are clear problems with this stock, but these are mainly short-term issues that can be rectified in time. The management has addressed the body armour shortcomings by taking the courageous decision to wind down this part of the business. With solid fundamentals and potentially encouraging price action, I am glad I invested in this stock and will be adding in the near future. I am not surprised this stock is up 10% today.
