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Enersys Suffers From High Costs & ERP implementation Issues

Zacks Equity Research

On Aug 19, we issued an updated research report on Enersys ENS.

Over the past three months, the company has lost 5.5% compared with the industry’s decline of 3.8%.

 


Read on to find the major factors affecting the Zacks Rank #4 (Sell) company’s prospects and why it may be prudent to avoid it at the moment.

Existing Scenario

Rising cost of sales has been a major concern for EnerSys over the past several quarters. Notably, the metric recorded increases of 14.7% and 14.6% in the fourth quarter of fiscal 2019 (ended Mar 31, 2019) and first-quarter fiscal 2020 (ended Jun 30, 2019), respectively, despite cost-reduction initiatives. Further, in the first quarter of fiscal 2020, the company’s operating margin declined 70 basis points year over year to 8.8% due to a 31.6% increase in operating expenses.

Also, its motive power product line is experiencing ERP implementation issues in the Americas region. Notably, the company’s operating earnings (excluding restructuring charges) of the Americas segment declined 170 bps in the first quarter of fiscal 2020 on a year-over-year basis due to ERP implementation challenges at the Richmond, KY-based facility. We believe that persistent softness in this product line will weigh on the company's financials in the quarters ahead.

Moreover, high debt level is concerning for EnerSys. Notably, in the last five fiscal years (2015-2019), its long-term debt rose 14.5% (CAGR). The metric (net of unamortized debt issuance costs) grew 66.1% to $978.6 million on a year-over-year basis at the end of the first quarter of fiscal 2020.

Further, the company’s earnings estimates have been trending south over the past month, with two downward estimate revisions for fiscal 2020 (ending Mar 31, 2020). Notably, the Zacks Consensus Estimate for its fiscal 2020 earnings is pegged at $5.39, lower than $5.81 mentioned 30 days ago.

Stocks to Consider

Some better-ranked stocks in the Zacks Industrial Products sector are Cintas Corporation CTAS, Dover Corporation DOV and DXP Enterprises, Inc. DXPE. All these companies currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Cintas delivered average earnings surprise of 6.27% in the trailing four quarters.

Dover pulled off average positive earnings surprise of 6.91% in the trailing four quarters.

DXP Enterprises delivered average earnings surprise of 18.06% in the trailing four quarters.

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