We issued an updated research report on EnerSys ENS on Feb 12.
This company, with a market capitalization of approximately $3 billion, currently carries a Zacks Rank #3 (Hold).
A few growth drivers and certain headwinds, which might influence EnerSys, are discussed below.
Factors Favoring EnerSys
Solid Top-Line Prospects: EnerSys’ top-line performance was impressive in the third quarter of fiscal 2019 (ended Dec 30, 2018), with revenues increasing 3.2% year over year. The improvement was backed by favorable pricing impact of 2% and acquisition gains of 4%. Reserve power products sales grew 0.8% and that of motive power increased 5.6%.
In the quarters ahead, EnerSys stands to gain from solid product portfolio, favorable pricing and sturdier sales secured from major businesses (like motive power).
The Zacks Consensus Estimate for revenues is pegged at $2.8 billion for fiscal 2019 (ending March 2019) and $3.4 billion for fiscal 2020 (ending March 2020). Estimates represent year-over-year growth of 9.5% for fiscal 2019 and 20.2% for fiscal 2020.
Restructuring Initiatives & Long-Term Targets: EnerSys has been gaining from restructuring initiatives over time. The company initiated actions to strengthen American and Asian operations as well as the reserve power business in EMEA in fiscal 2019. These measures will be completed in fiscal 2019.
EnerSys has set some long-term targets. It anticipates organic sales growth of 4% (CAGR) from fiscal 2018 through 2021. Also, operating margin is predicted to grow 200 basis points over this period on the back of organic sales growth, solid product mix, lean initiatives and new products.
Capital Allocation: EnerSys uses capital for making acquisitions, buying back shares and paying dividends. In relation to acquired assets, in December 2018, the company bought Alpha Technologies Group of Companies — which engages in providing state-of-the-art energy solutions for telecom, broadband, industrial, renewable and traffic customers.
Alpha Technologies is predicted to strengthen EnerSys’ product portfolio across telecom, broadband, industrial and renewable markets. The combined businesses will create a fully-integrated energy and direct current power storage solution provider. This buyout is anticipated to generate more than $25 million in annualized synergies. Also, earnings accretion is predicted in the upcoming quarters.
In addition to buyouts, the company regularly pays dividends to shareholders and also buys back shares. In the first three quarters of fiscal 2019, EnerSys used $22.3 million for paying dividends to shareholders and $25 million for purchasing treasury stocks.
Factors Working Against EnerSys
Share Price Performances and Earnings Estimates: Market sentiments have been against EnerSys for quite some time now. Its stock price has decreased roughly 13.9% in the past three months compared with the industry’s decline of 0.8%.
Notably, EnerSys’ shares have declined roughly 18.1% since the release of third-quarter fiscal 2019 results (ended Dec 30, 2018) on Feb 6, 2019. The company’s earnings lagged the Zacks Consensus Estimate by 5.6% and declined 6.4% year over year in the reported quarter. Also, the bottom line was below the company’s projection of $1.23-$1.27.
The Zacks Consensus Estimate for earnings is pegged at $4.93 for fiscal 2019 (ending Mar 2019) and $6.12 for fiscal 2020 (ending Mar 2020), reflecting declines of 3.9% and 5.1% from the respective seven-day-ago tally.
Enersys Price and Consensus
Enersys Price and Consensus | Enersys Quote
Higher Costs of Sales: EnerSys is currently dealing with rising cost of sales, especially due to fluctuations in commodity prices (especially that of lead). In the third quarter of fiscal 2019, the company’s cost of sales expanded 4.8% on a year-over-year basis despite cost-saving initiatives. Further, gross margin in the quarter was down 120 basis points (bps) year over year to 24.2%.
Escalating costs, if uncontrolled, may continue hurting the company’s margins in the upcoming quarters.
Other Headwinds: EnerSys’ international operations exposed it to risks arising from unfavorable movements in foreign currencies as well as uncertainties related to politics, labor market and economic instability. In the third quarter of fiscal 2019, forex uncertainties adversely impacted sales by 3%. In addition, increased investments on product development, lean initiatives and system enhancements are weighing on the company’s bottom line.
Stocks to Consider
Some better-ranked stocks in the Zacks Industrial Products sector are Colfax Corporation CFX, Roper Technologies, Inc. ROP, and Dover Corporation DOV. All these stocks currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
In the past 60 days, earnings estimates for these stocks have improved for 2019. Further, the average earnings surprise was a positive 8.88% for Colfax, 4.96% for Roper and 6.59% for Dover.
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