EnerSys (ENS): Can Solid Sales Offset Weak Spending Trend?

On Aug 12, we issued an updated research report on EnerSys (NYSE:ENS) .

Headquartered in Pennsylvania, EnerSys operates in the lead-acid battery market and has largest leading position in the Reserve Power and Motive Power markets. Going forward, EnerSys expects to launch premium products in nickel, zinc and lithium batteries to bolster growth.

The company is confident about the prospects of its Motive Power business on the back of a sustained uptick in orders. Prospects of the Reserve power business also remains strong given the surge in demand for Thin Plate Pure Lead batteries (TPPL) employed in UPS, cable television and auxiliary power units for trucks.

EnerSys has certain strategies in place through which it expects to grab a greater market share as well as improve its position in selected geographies. Currently, working to expand its share in the Asian geographies, the company has announced that for the second half of the year it has set operating earnings target of 10% to boost profitability. Encouragingly, EnerSys has been experiencing double-digit order growth in the region on the back of the previously announced fiber-to-the-home project in Australia.

This apart, keen eye for strategic acquisitions is expected to strengthen its core business lines. We believe the buyout of Australia-based ICS Industries during the second quarter of 2016, has significantly boosted its foothold in stored energy business. Also, the partial buyout of molten salt "thermal" batteries manufacturer The Enser Corporation in the fourth quarter of 2016 is promising. Going forward, this acquisition will likely broaden its capabilities in the design and development, testing, and automated manufacturing of thermal batteries for the U.S. Department of Defense as well as allied militaries.

Despite these positives, lower investment in 4G technology by telecommunication companies in key geographies is proving to be a major concern for the company. In particular, a dramatic reduction in investment activities in the Middle East and Russia dented the telecommunications business' performance significantly. In addition, sales of EnerSys’ products depend heavily on specific conditions in the end markets and softness in key geographies which are hurting the company’s financials.

Going forward, the company believes seasonal vacation trends in Europe and the U.S. will likely cause sales volume deterioration in the second quarter of fiscal 2017. In addition, a significant portion of EnerSys’ revenues and expenses are denominated in foreign currencies which renders it vulnerable to fluctuations in exchange rates. During the first quarter of fiscal 2017, foreign currency translation accounted for a 2% decline in revenues. Going forward, we believe currency fluctuations and softer spending on the part of clients can pose as major concerns for the company.

Also, EnerSys faces strong competition from companies including Johnson Controls Inc. (NYSE:JCI) , Franklin Electric Co., Inc. (NASDAQ:FELE) and AO Smith Corp. (NYSE:AOS) .