Sunday, April 26, 2020

An AIM Small Cap holding: EnerSys (ENS, $ENS): “5G internet expansion is key” by: Brook Seifu, AIM student at Marquette University. Long-term hold...

EnerSys (ENS, $ENS): “5G internet expansion is key
By: Brook Seifu, AIM Student at Marquette University

Image result for enersys logo

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) manufactures and markets industrial batteries. The firm engages in stored energy solutions for industrial applications, distributes reserve power and motive power batteries, chargers, power equipment and battery accessories to end markets.
• In light of the recent COVID-19 outbreak, EnerSys’s management is expecting to see revenue decline and cancelation in customer orders.
• EnerSys’s strong balance and flexible liquidity is key to weather the impact of the virus and capture acquisition opportunities.
• The delay of 5G network and expansion will have a material impact on EnerSys revenue in fiscal year 2021 and 2022.

Key points: After considering the impact of coronavirus, ENS announced the withdrawal of its guidance for the Q4 ending March 31, 2020. Following the suspension of Q4 guidance, management just released a preliminary unaudited result for the quarter ending March 31, 2020. In the report, the company projected a revenue of $782, which represented a 3% reduction, excluding currency exchange impacts. Operating expenses were $5 million lower than initial projection. This was as a result of cost initiatives in response to COVID-19. Based on this new result, it is evident that EnerSys will face top-line and bottom-line challenges.
In this unprecedented time, companies with strong balance sheet and liquidity tend to have the capability to weather the current crisis. EnerSys is amongst those companies that have the financial arm strength to sustain short-term headwinds. As of March 31,2020, the company had $350 million in cash, $600 million in short-term receivables and $700 million revolving credit line. The company is set to benefit from its strong balance with no significant maturities related to its term loans, revolving credit line or notes until FY 2024. In addition, EnerSys will have the flexibility to explore acquisition targets with a potential discounted price.

EnerSys was pitched back in November 1,2019, and 5G Rollout was one if its primary drivers. However, the outbreak of Coronavirus is expected to delay the expansion of this project to fiscal years 2022-2023. In addition, capital expenditures from telecom may fall under pressure due to the shrinking revenue and decreases in consumer spending. Due to the delay, ENS will have to wait additional years to capture the expected revenue opportunity of $2B.

What has the stock done lately?
Since the mid of March, EnerSys’s stock has surged 38% after trading at its 1-year low of $38.24. The stock is currently trading at $52.85. However, the stock is down 14% from the purchase price of $68.45. EnerSys’s high beta and high exposure to the economic impact of the virus are the two factors the contributed to plunge and volatility.

Past Year Performance:
EnerSys’s stock has had a stagnant year, it is currently down 26% since April 2019. The stock has been trading between the range of $60-80 for the past five years. The current P/E ratio is at 14.1x, which is well below the five-year average of 20.9x. COVID-19 is a major threat for ENS and other players in the industry. However, the stock has an enormous potential to yield returns to its investors, once 5G floods the world.

1 Year Stock Chart vs. Benchmark from FactSet
Source: FactSet

My Takeaway
EnerSys is a company with exciting opportunities ahead and strong balance sheet to weather the anticipated economic downturn. The company has adequate cash balance and liquidity to pay current liabilities and capture fragmented competitors. As the overall market is adjusting, the stock will bounce back to its previous level. Acquisitions from FY 2019 have proved to be integral part of EnerSys future growth. I believe we are still waiting to see the best out of EnerSys, which is well positioned to capture significant market share of 5G internet expansion. Therefore, I recommend that the AIM portfolio holds on to its position in ENS.

1 Month Stock Chart from FactSet

Source: FactSet