Sunday, April 26, 2020

An AIM Equity Fund holding: EnerSys (ENS, $47.98): “Recharging Upside” by: Solomon Dworsky, AIM student at Marquette University. A solid long-term holding ready for 5G.

EnerSys (ENS, $47.98): “Recharging Upside”
By: Solomon Dworsky, AIM Student at Marquette University

EnerSys - Power/Full Solutions

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.


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.

Source: FactSet