A month has gone by since the last earnings report for EnerSys (ENS). Shares have lost about 11.8% in that time frame, underperforming the S&P 500.
Will the recent negative trend continue leading up to its next earnings release, or is EnerSys due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.
EnerSys Q3 Earnings Lag Estimates, Margins Drop Y/Y
EnerSys reported weaker-than-expected results for the third quarter of fiscal 2019 (ended Dec 30, 2018), with a negative earnings surprise of 5.6%.
The company's adjusted earnings in the reported quarter were $1.17 per share, lagging the Zacks Consensus Estimate of $1.24. Also, the bottom line decreased 6.4% from the year-ago figure of $1.25.
Favorable Pricing and Acquired Assets Drive Revenues
In the quarter under review, EnerSys' net sales were $680 million, reflecting growth of 3.2% from the year-ago quarter. The improvement was driven by positive price impact of 2% and acquisition gains of 4%, partially offset by adverse forex woes of 3%. However, the top line lagged the Zacks Consensus Estimate of $688.8 million by 1.3%.
It is worth mentioning here that the company successfully completed the acquisition of Alpha Group in December 2018.
Sales generated from the reserve power product line totaled $329.5 million, increasing 0.8% year over year while that generated from motive power grew 5.6% to $350.5 million.
The company reports net sales under three segments discussed below:
Revenues from the Americas segment (representing roughly 59.1% of the reported quarter's net sales) were $402 million, increasing 13.8% year over year. The improvement was driven by 5% gain from organic volume growth, 3% rise from favorable pricing and 8% increase from acquired assets, partially offset by forex woes of 2%.
Revenues from the Europe, Middle East and Africa (EMEA) segment (32%) totaled $217.8 million, decreasing 3.2% year over year. Adverse impact of 5% from unfavorable movements in foreign currencies was partially offset by 2% growth in organic volumes.
Revenues from the Asia segment (8.9%) were $60.2 million, down 25.5% from the year-ago figure. Decline in organic volume impacted results by 23% and forex woes had an adverse 4% impact. This was partially offset by 2% favorable pricing.
In the quarter under review, EnerSys' cost of goods sold increased 4.8% year over year to $515.4 million. It represented 75.8% of net sales compared with 74.6% in the year-ago quarter. Gross profit decreased 1.6% year over year to $164.6 million, with margin decreasing 120 bps to 24.2%. Commodity cost inflation had an adverse impact of $10 million, partially offset by organic volume growth and favorable pricing.
Operating expenses grew 15.8% year over year to $112 million. It represented 16.5% of net sales. Operating income in the quarter under review decreased 27.2% year over year to $50 million. Operating margin slipped 300 bps to 7.4%.
Balance Sheet and Cash Flow
Exiting the fiscal third quarter, EnerSys had cash and cash equivalents of $397.2 million, roughly 27.2% below $545.2 million at the end of the last reported quarter. Long-term debt balance increased 81.3%, sequentially, to $1,087.3 million.
In the first nine months of fiscal 2019, the company generated net cash of $166.4 million from operating activities, reflecting 28.1% growth from the year-ago quarter. Capital expenditure totaled $52.7 million versus $43.1 million in the first nine months of fiscal 2018.
During the period, the company used $22.3 million for paying dividends and $25 million for purchasing treasury stock.
For the fourth quarter of fiscal 2019 (ending March 2019), EnerSys anticipates adjusted earnings of $1.41-$1.45 per share. Notably, the company's legacy business will account for $1.40 per share and Alpha contributions were 6 cents. This was partially offset by 3 cents of dilution caused by share issuances related to the acquisition of Alpha.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -6.91% due to these changes.
At this time, EnerSys has an average Growth Score of C, a grade with the same score on the momentum front. However, the stock was allocated a grade of A on the value side, putting it in the top 20% for this investment strategy.
Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.
Estimates have been broadly trending downward for the stock, and the magnitude of this revision indicates a downward shift. Notably, EnerSys has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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