By:
Brook Seifu, 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.
• 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
