EnerSys
(ENS, $47.98): “Recharging Upside”
By:
Solomon Dworsky, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship with any company whose stock is
mentioned in this article.
Summary
• EnerSys. (NYSE:ENS) provides energy storage solutions for
industrial applications operating under two main segments, Motive batteries representing
49.6% FY’19 Revenue, and Reserve power representing 51.4% FY’19 Revenue.
•Management recently suspended
2020 guidance due to the lack of visibility caused by Covid-19.
•The company has
continued operations in select locations during the pandemic as well as began
reopening additional plants.
•The Reserve power
segment maintains long term growth opportunities with the 5G rollout.
Key
points:
Covid-19 significantly
impacted the company as seen with the -37.30% drop in stock price from the 2020
high in early February. ENS has rebounded since to $47.98 following
management’s decision to suspend 2020 guidance due to the lack of visibility
from the virus. EnerSys responded to the pandemic by donating 8,000 masks and
18,000 nitrile gloves to local hospitals located in Pennsylvania and France.
Additionally, the firm announced they are continuing operations at select
manufacturing facilities as EnerSys was deemed an essential business.
EnerSys recorded an
increase of sales by 8% YoY for Q3 which was largely driven by the American
Motive segment. Other segments experienced decreased demand due to unfavorable
trade conditions as well as OEM orders declining. The firm increased their
leverage ratio to 2.5x, far below their required ratio of 3.5x per a new credit
agreement. Covid-19 caused shutdowns across several plants located in China and
are beginning to reopen for operation to meet consumer demands.
EnerSys holds
roughly $300 million in cash on their balance sheet with additional access to
$750 million in revolvers providing the firm a strong balance. The firm
currently holds 1,125 million in debt outstanding with the majority of their
debt due 2022 and beyond. Management recently stated share repurchases are will
not be utilized given current market conditions.
EnerSys experienced minor
setbacks due to Covid-19 and are beginning to reopen manufacturing facilities
located in China, Europe and the United States. Additionally, EnerSys will
continue to work remotely for non-manufacturing employees and follow the
guidelines set for the pandemic. The 5G rollout has experienced slowdowns
although demand for telecommunications is increasing as the workforce shifts to
online services. The recent acquisitions of Alpha and NorthStar position the
company to increase their market share within the telecom sector as well as
significantly increase output.
What
has the stock done lately?
EnerSys was pitched
November 9th, 2019 at a price of $68.00 with a target price of
$87.92. The stock reached a 2020 high of $77.82 in February before crashing to
$38.35 following the market’s response to Covid-19. The stock is currently
trading at $47.98, above the 52-week
low of 35.21 and below the 52-week high of $78.97. The majority of analysts,
according to FactSet, have the stock as a buy with an estimated price target of
$74.33. Using these factors, the stock continues to hold a potential upside of
66%.
Past
Year Performance:
ENS
has decreased by -31% YTD due to unfavorable market conditions with Covid-19 as
well as a plant fire located in Richmond Kentucky. The firm seems to be holding
strong through the virus as they were deemed an essential business enabling
them to continue production. Additionally, management recently stated operating
expenses were $5 million lower than expectations. Despite the current
headwinds, EnerSys is positioned to continue to gain value with the current
adverse market conditions.
Source:
FactSet
My
Takeaway
Covid-19
has caused both headwinds for the firm and an opportunity for investors to
purchase the stock at a discount. The company began reopening manufacturing
facilities to fill outstanding orders and meet the pending demand for the 5G
rollout. Management recently suspended 2020 guidance due to a lack of
visibility providing investors uncertainty. In the event of a larger than
anticipated downturn, EnerSys has a strong balance sheet and access to
revolvers to increase their liquidity. As the economy begins to recover from
the pandemic, EnerSys has the potential to increase in value by expanding into
the telecom sector with the 5G rollout as well as continuing to rely on their
strong core businesses. Using these factors, EnerSys has the potential of
reaching the original target price of $87.92 as the economy recovers.
