Summary:
EnerSys’ earnings estimates have moved north by 4% over the past 60 days,
indicating bullish analyst outlook. Going forward, bright prospects in the global motive
power & reserve power businesses coupled with the company’s leading position in
the lead-acid battery market looks promising. In this regard, strong demand for TPPL
products and UPS business adds to the company’s strength. The company believes
that solid order activity, fuelled by new electric fork truck orders, will drive growth in
the motive power business. Also, the company’s strategies to expand footprint in the
rapidly growing Asia-Pacific markets, solid financial health and prospective
acquisitions will likely drive long-term growth. However, strained top-line growth,
continued rise in operating expenses and restructuring & exit charges pose challenges
for the company’s profitability in the coming quarters.
Reasons to Buy:
- EnerSys, operating in the lead-acid battery market, has one of the largest market shares in both its Reserve Power and Motive Power product business lines. The company is one of the dominant players in the global lead-acid battery market with a projected compounded annual growth rate of 4.6% during 2014–2020, according to “FMI” future market research. Going forward, EnerSys is confident about the prospects of its motive power business owing to the sustained increase in orders throughout fiscal 2016. Favorable product mix and a thriving eretail industry in the U.S. coupled with the acceptance of the Iron Clad brand in Western Europe look promising. Going forward too, the company believes that solid order activity, fuelled by new electric fork truck orders, will drive further growth in the motive power business. Prospects of the Reserve power business also remains strong given the surge in demand for Thin Plate Pure Lead batteries (TPPL) employed in UPS, cable television and auxiliary power units for trucks. Moreover, the company’s Uninterruptible Power Systems business (“UPS”) is benefiting from the recent EU decision on Safe Harbor personal data privacy and storage, which has resulted in a surge of data centers construction across Western Europe.Also, an uptick in the Reserve Power business in African markets is expected to supplement EnerSys’ growth momentum going forward.
- EnerSys has certain strategies in place through which it expects to grab a greater market share as well as improve its position in selected geographies. Currently working to expand its share in the Asian geographies, the company has announced that for the second half of the year it has set operating earnings target of 10% to boost profitabiltiy, going forward. Encouragingly, EnerSys has been experiencing double-digit order growth in the region on the back of previously announced fiber-to-the-home project in Australia. Moreover, the company is expected to join the low-price telecom business in the Chinese market and is now getting a clear picture of the tender results for the same, which seem positive. During the reported quarter, the company continued to receive significant telecommunications orders in China that is expected to increase the capacity utilization at the Chongqing facility and increase manufacturing efficiencies.
- EnerSys has a keen eye for strategic acquisitions to further strengthen its core business lines. During 2002–2014, the company has acquired 25 companies worldwide to expand its portfolio and improve its competitive prowess. Currently, the company is seeking out strategic acquisition opportunities, in order to expand its footprint in fast-growing markets, in which it presently has limited exposure. In this regard, it is exploring more non-lead acid technologies for strengthening its Reserve, Aerospace & Defense, and Motive markets. The company completed the buyout of Australia-based ICS Industries in the second quarter of 2016 that has significantly boosted its foothold in the stored energy business, including both the reserve and motive power businesses. During the fourth quarter of fiscal 2016, the company completed the takeover of certain assets of The Enser Corporation, a leading manufacturer of molten salt "thermal" batteries. The buyout will help EnerSys expand its footprint in the aerospace and defense markets. The acquisition will also broaden its capabilities in design and development, testing, and automated manufacturing of thermal batteries for the U.S. Department of Defense as well as allied militaries.
- EnerSys’ robust financial health adds to its strength. The company has a leverage ratio of 1.5x, regardless of spending over $208 million in share repurchases and dividends in fiscal 2016, and this testifies to its strong balance sheet position. This apart, the company has a diligent capital-deployment strategy and regularly returns wealth to its shareholders through dividends and share repurchase programs. At the end of fourth-quarter 2016, the company had $397 million of cash and short-term investments on hand, with nearly $472 million undrawn from credit lines around the world. It also generated $308 million in cash from operations in fiscal 2016. This apart, the company’s focus to enhance manufacturing efficiency and reduce costs over the next few years is expected to bolster growth.
- Most of EnerSys’ clients operate in industries that are characterized by general cyclical trends, and this exposes the company to an inherent seasonality in demand pattern. During the fourth quarter of fiscal 2016, the company’s performance was affected by lower investment in 4G technology by the telecommunication companies in key geographies. In particular, a dramatic reduction in investment activities in the Middle East and Russia stunted the telecommunications business' performance significantly. Moreover, in the Americas, the company’s enclosure business continued to experience a significant slowdown in spending, which will likely impact its top-line performance in the forthcoming quarters. The company believes that in order to absorb some excess inventory, customers have cut spending, which is causing the main trouble. Hence, this remains a concern. Also, EnerSys’ mining business in South Africa has been significantly impacted by the fall in commodity prices. Prolonged weakness in market conditions will likely hurt the company’s profitability, going forward.
- A significant portion of EnerSys’ revenues and expenses are denominated in foreign currencies which renders it vulnerable to fluctuations in exchange rates. Strengthening of the U.S. dollar against foreign currencies like the Euro, British pound, Polish zloty, Chinese Renminbi, Mexican peso and Swiss Franc hurts the company’s revenues and operating margins. Around 60% of the company’s net sales are sourced from outside the U.S. During the fourth quarter of fiscal 2016, foreign currency translation accounted for a 2% decline in revenues. Most of EnerSys’ exposure to foreign currency is related to the Euro. The company’s statistics show that past fluctuations in the Euro have contributed to major issues in production costs Going forward, the company expects currency fluctuations to pressurize top-line growth and hamper its flexibility in adjusting costs, thereby pressurizing margins.
