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Enerpac (EPAC) Up 15.6% Since Last Earnings Report: Can It Continue?

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A month has gone by since the last earnings report for Enerpac (EPAC - Free Report) . Shares have added about 15.6% in that time frame, outperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is Enerpac due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

Enerpac Tool Reports Loss in Q3, Revenues Decline Y/Y

Performance of Enerpac Tool in third-quarter fiscal 2020 (ended May 31, 2020) was severely impacted by the coronavirus outbreak, and volatile oil and gas prices. Its earnings and sales in the quarter missed the Zacks Consensus Estimate by 150% and 15.47%, respectively.

In the quarter, the company recorded loss of 6 cents per share as against the Zacks Consensus Estimate of earnings of 12 cents per share. Also, the bottom line deteriorated from earnings of 29 cents reported in the year-ago quarter.

Top-Line Detail

The company generated revenues of $101.9 million in the fiscal third quarter, reflecting 42.8% decline from the year-ago figure. The top line also lagged the Zacks Consensus Estimate of $120.53 million. New products accounted for more than 10% of quarterly sales.

Organic sales in the quarter were down 38% year over year due to a 47% fall in service revenues and a 35% decline in product sales. Divestitures/acquisitions (net) adversely impacted revenues by 7%, while movements in foreign currencies had a positive impact of 2%.

Geographically, the company’s sales decreased in low 30% in Asia while decreased in mid 30% in Europe and North America. Also, sales in the Middle East declined in high 50% on a year-over-year basis.

The segmental information is briefly discussed below.

Industrial Tools & Services (91.2% of third-quarter fiscal 2020 net sales): Revenues at the segment totaled $92.9 million, reflecting a 44.3% decline from the year-ago figure. The segment’s core sales decreased 39% while Divestitures/acquisitions (net) had adverse impact of 7%. Forex woes had positive impact of 2%.

Other (8.8% of third-quarter fiscal 2020 net sales): Revenues at the segment totaled $9 million, down 20.7% from the year-ago figure.

Margin Profile

In the reported quarter, Enerpac Tool’s cost of sales decreased 37.7% year over year to $59.9 million. It represented 58.8% of the quarter’s net sales compared with 54% in the year-ago quarter. Gross margin declined 490 basis points (bps) year over year to 41.2%. Selling, administrative and engineering expenses decreased 22.8% year over year to $40.8 million.

Adjusted EBITDA were $6.6 million, down 80.3% year over year. The adjusted EBITDA margin was 6.5% compared with 18.8% in the year-ago quarter.

On the other hand, adjusted operating income was just $52,000, way below $28.3 million in the year-ago quarter. Adjusted operating margin in the quarter was 0.1% compared with 15.9% in the year-ago quarter. Net financing costs declined 36.3% year over year to $4.6 million.

The company benefited from $12 million in cost savings realized from the temporary actions undertaken by the company.

Balance Sheet and Cash Flow

Exiting third-quarter fiscal 2020, Enerpac Tool’s cash and cash equivalents totaled $163.6 million, a slight improvement from $163.4 million at the end of the last reported quarter. Long-term debt was roughly stable sequentially at $286.5 million.

The company’s net debt to adjusted EBITDA was 1.8x at the third-quarter end, same as the year-ago figure.

The company generated net cash of $13 million from its operating activities in the third quarter, reflecting year-over-year decline of 75.2%. Capital spending totaled $2.3 million, down 70.9% year over year. Also, it purchased $9.7 million worth of treasury shares in the quarter.

Outlook

The company is wary about the global uncertainties related to the coronavirus outbreak. It kept its financial projections suspended for fiscal 2020 (ending Aug 31, 2020).

In second-half fiscal 2020, the company anticipates realizing savings of $20 million from the temporary cost-reduction measures taken due to the pandemic. Also, it is working on some other cost-reduction actions that are likely to have permanent impacts. In addition, the company noted that product order rates might show improvement in the quarters ahead as markets gradually reopen.

Also, the company is focused on building a solid product portfolio as well as on improving commercial effectiveness through digital marketing and e-commerce programs and other actions.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in estimates revision. The consensus estimate has shifted -25.64% due to these changes.

VGM Scores

At this time, Enerpac has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Following the exact same course, the stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise Enerpac has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.


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