Friday, August 10, 2012

Enersys: Profits on Old School Products

One after another this earnings season developers of renewable energy have reported the dismal, but largely expected news of losses on little or no revenue.  In no other group has the disappointment been more acute than with the battery developers.  The problems of A123 Systems (AONE:  Nasdaq), Ener1 (HEVVQ:  OTC) or Altair Nanotechnologies (ALTI:  Nasdaq) are well chronicled in press releases and SEC filings.

Yet there is one battery company that is consistently reporting sales and profits  -  Enersys, Inc. (ENS:  NYSE).  That is because Enersys is an “old school” battery producer with a legacy business selling car batteries and other conventional energy storage solutions.  Enerys recently reported a tidy profit of $45.8 million on $593.9 million in total sales its first fiscal quarter ending July 1st.  Profitability even improved in the quarter to a net margin of 7.7% compared to 6.3% in fiscal year 2012, when Enersys earned $144.0 million in net income on sales of $2.28 billion.

Cash-strapped developers such as A123 and Altair can also be jealous of Enersys’ balance sheet.  Its operations generated $204.2 million cash flow the fiscal year that ended in March 2012 and another $24.2 million in first quarter of the current fiscal year.  That helped pay off short-term debt as well as boost cash on the balance sheet to $180.7 million.

The stark contrast of the struggling new age battery solution developers against the old line battery manufacturer says a great deal about just how reticent the world’s industrial and commercial complexes can be to embrace new technologies and practices.  Despite what appears to be growing support for environmentally friendly energy generation and storage solutions, developers are still battling sluggish order flow and skimpy capital investment.

That is not to say that established battery companies have not added advanced solutions to their product lines or invested capital in technology development.  In 2010, Enersys acquired ABSL Power Solutions Ltd., a producer of lithium ion batteries.  Last year the company also launched a joint venture with Germany’s Lithium Technology Corp. to produce large format lithium-ion battery cells.  Enersys offers electric vehicle solutions, but you are not likley to find them under the  hood of your neighbor’s new electric vehicle.    Enersys transportation batteries are mostly for unmanned air and undersea craft.   That said, sales of these products represent a minor portion of Enersys’ financial success.

Enersys shares are selling for 9.9 times the consensus estimate of earnings in fiscal year 2013.  This may appear to be a bargain against average multiples in the S&P 600.  However, this does exceed forecasted growth rates.  Analysts may be a bit skittish about demand from military users, a key market for Enersys.  Recently, the stock ran up on the euphoria the success in the first fiscal quarter 2012.  I think any pullback could present a compelling opportunity to take a long position in a profitable battery producer that is finally coming around to embrace advanced battery solutions.

Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.  ENS is included in the Storage Group of Crystal Equity Research’s Mothers of Invention Index.

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