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Here's Why You Should Steer Clear of Enersys (ENS) Right Now

Zacks Equity Research

Enersys ENS continues to struggle with the headwinds that have marred its operational performance over the past few quarters. We expect that persistent rise in operating expenses, among other factors, will continue to hinder the company’s growth.

It’s not surprising that the stock has also put up a dismal show in the recent times. In the past three months, Enersys has lost 14.3%, wider than the industry’s decline of 5.5%. Further, the Zacks Consensus Estimate for fiscal 2020 earnings has moved south over past seven days from $6.12 to $5.81.

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

Factors at Play

Rising cost of sales has been a major cause of concern for Enersys over the past few quarters. Notably, the metric increased 14.7% in the fourth quarter of fiscal 2019, despite cost-reduction initiatives. Further, in the quarter, EnerSys’ operating margin decreased 550 basis points year over year to 4.4% due to 35.4% increase in operating expenses. Escalating costs may continue hurting the company's margins in the upcoming quarters.

Also, of late, the company’s reserve power product line has been experiencing weaker demand as several of telecom customers in the United States deferred spending on legacy networks. In addition, sales from the company’s motive power product line are being adversely impacted from ERP implementation issues in the Americas region. We believe, persistent softness in any of these product lines business will affect the company's financials in the quarters ahead.

Moreover, higher spending on lean initiatives, products development and system enhancements such as SAP, sales force and success factors are weighing on the bottom line. Further, the company remains exposed to risks associated with adverse changes in foreign currency exchange rates, interest rates and commodity prices. For instance, forex woes adversely impacted sales in the fourth quarter of fiscal 2019 by 5%.

In addition, in the last five fiscal years (2015-2019), EnerSys’ long-term debt jumped 14.5% (CAGR) while the metric ($972 million) at the end of fiscal 2019 represented year-over-year rise of 67.6%. As a matter of fact, a highly leveraged balance sheet can inflate the company’s financial obligations and subsequently, hurt profitability.

Stocks to Consider

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

Roper delivered average earnings surprise of 8.43% in the trailing four reported quarters.

Dover pulled off average positive earnings surprise of 8.61% in the previous four reported quarters.

DXP Enterprises delivered average earnings surprise of 48.47% in the trailing four reported quarters.

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