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Enersys' (ENS) Long-Term Prospects Bright, Risks Remain

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On Jul 9, we issued an updated research report on Enersys (ENS - Free Report) .

In the past six months, this Zacks Rank #3 (Hold) stock has yielded a return of 10.3% against the industry’s decline of 10.8%.

Existing Scenario

EnerSys’ long-term growth drivers include higher demand for premium products, lean initiatives, robust prospects in Asia and strategic product launches. Currently, EnerSys is experiencing healthy demand for batteries from energy-storage products, commercial trucks, and aerospace, and defense applications. Also, the company has an interesting lineup of product launches, which it believes, will stoke growth in the upcoming quarters. In fact, rise in the sale of premium products have significantly boosted top-line performance in the recent quarters.

Of late, both the company’s segments — Motive Power and Reserve Power — have been witnessing solid performance. For Motive Power business, the company believes that China will provide the much-needed growth impetus. Also, strong sales of thin plate pure lead, IRONCLAD, gel, high-frequency chargers and battery management systems in key end markets including Europe, Middle East and Africa are also adding to the strength of this segment. Further, the company’s Reserve Power business is also faring well. It believes that India’s market will act as the strongest catalyst for the Reserve Power Business.

Further, the company’s business streamlining initiatives, aimed at transforming the organization into a leaner one, bode well. Presently, EnerSys is focusing on reducing costs of goods sold permanently by a minimum of 2% or $35 million by the end of fiscal 2019. These savings are expected to be driven by eliminating waste, increasing productivity and reducing costs.

However, EnerSys is exposed to fluctuations in commodity prices, especially that of lead. The continuous increase in the price of lead and other raw materials including steel, plastic and copper is a formidable headwind. Rising cost of raw materials are expected to inflate the cost of goods sold, thus eroding profitability.

This apart, a significant portion of EnerSys’ revenues and expenses are denominated in foreign currencies, which renders it vulnerable to fluctuations in exchange rates. Strengthening of the U.S. dollar against foreign currencies may hurt the company’s revenues and operating margins. Going forward, EnerSys expects currency fluctuations to weigh on top-line growth and hamper its flexibility in adjusting costs, thereby putting pressure on margins. 

Key Picks

Some better-ranked stocks from the same space are A. O. Smith Corporation (AOS - Free Report) , Capstone Turbine Corporation (CPST - Free Report) and Eaton Corporation, PLC (ETN - Free Report) . All the three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

A. O. Smith surpassed estimates thrice in the trailing four quarters, with an average positive earnings surprise of 3.12%.

Capstone Turbine outpaced estimates thrice in the preceding four quarters, with an average earnings surprise of 37.50%.

Eaton Corporation exceeded estimates twice in the preceding four quarters, with an average positive earnings surprise of 1.33%.

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