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Enerpac's Products & Cost-Saving Moves to Aid Amid Pandemic

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We have issued an updated research report on Enerpac Tool Group Corp. (EPAC - Free Report) on Jun 29.

The company presently has a market capitalization of $998 million and a Zacks Rank #3 (Hold). It belongs to the Zacks Manufacturing – Tools & Related Products industry, which in turn comes under the ambit of the Zacks Industrial Products sector. The industry is among the top 26% (with rank of 65) of more than 250 Zacks industries. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

There are a number of factors that are influencing Enerpac’s near-term prospects. Given below is a brief discussion on the important factors:

Factors Favoring Enerpac

Multiple Tailwinds: The company seems well positioned to gain from its growth initiatives, efforts to improve commercial effectiveness through e-commerce and digital marketing programs, and exit from non-profitable businesses. Further, the company’s efforts to introduce new products might be beneficial.

In third-quarter fiscal 2020 (ended May 2020), the company introduced six new products while three products were introduced in both the first quarter (ended November 2020) and second quarter (ended February 2020). Notably, sales derived from new products represented more than 10% of total quarterly revenues on all occasions in the first three quarters of fiscal 2020 (ended May 2020).

Capital Allocation Strategies: The company uses its resources for rewarding its shareholders, making growth investments, debt repayments and acquisitions. In the first three quarters of fiscal 2020, the company used $27.5 million for purchasing treasury shares while paid dividends worth $2.4 million (no dividends were paid in the third quarter).

Also, during the period, the company acquired Cramlington, England-based HTL Group and since then has been helping the company to offer better rental services across the globe. Notably, this buyout boosted Enerpac’s sales by $2 million in the third quarter of fiscal 2020.

Restructuring Activities: Enerpac’s efforts to lower costs, consolidate facilities and improve operational efficiency have been proving beneficial. To realign its Industrial Tools & Services segment, the company initiated certain measures in March 2019.

In addition to the above-mentioned actions, the company has initiated actions to improve its marketing and commercial processes as well as deal to financial stress caused by the pandemic. It believes that temporary actions will yield $20 million in cost-savings in the second half of fiscal 2020.

Factors Working Against Enerpac

Share Price Performance, Overvaluation and Pandemic Woes: Market sentiments have been against the company for quite some time now. Its stock price has declined 0.5% in the past three months compared with the industry’s growth of 31.5%.

Also, the company’s stock currently appears overvalued when compared with the industry, with P/E (TTM) multiple of 46.39 and 17.07, respectively. Also, the stock’s current multiple is higher than the industry’s three-month highest level of 17.07.

The coronavirus outbreak had adverse impacts on the company’s third-quarter fiscal 2020 (ended May 31, 2020) results, with both earnings and sales lagging the Zacks Consensus Estimate by 150% and 15.47%, respectively. The company is wary about the pandemic-related uncertainties and so it kept its projections suspended for fiscal 2020.

Poor performance and prevailing difficulties seems to have resulted in lowered earnings estimates for Enerpac. In the past seven days, the Zacks Consensus Estimate for earnings declined 10% to 9 cents for fourth-quarter fiscal 2020, 4.8% to 40 cents for fiscal 2020 and 9.5% to 67 cents for fiscal 2021.

Enerpac Tool Group Corp. Price and Consensus

Enerpac Tool Group Corp. Price and Consensus

Enerpac Tool Group Corp. price-consensus-chart | Enerpac Tool Group Corp. Quote

Leverage and Liquidity: High debts and weak abilities to pay related financial obligations can be concerning for Enerpac. At the end of third-quarter fiscal 2020, the company’s long-term debts were $286.5 million while its cash and cash equivalents were $163.6 million. Also, its free cash flow in the quarter fell 75% year over year to $11 million.

In addition, the company’s trailing 12-month interest coverage ratio decreased from 4.0X at the end of the second quarter to 3.6X at the end of the third quarter. On the other hand, its financial leverage at 1.8X reflects an increase from the previous quarter’s figure of 1.3X. The sequential movements in both metrics are not in favor of the company.

Woes Related to International Presence & Peers: Enerpac operates in multiple geographical locations, including the Middle East, the United States, Asia and Europe. International diversification has exposed the company to macroeconomic challenges, unfavorable movements in foreign currencies, local competitive pressure and geopolitical issues.

In the third quarter of fiscal 2020, the company’s sales decreased in mid 30% in Europe and North America, while a fall in low 30% was recorded in Asia. Also, sales weakened in high 50% in the Middle East region in the quarter.

Three companies that compete with Enerpac are The Middleby Corporation (MIDD - Free Report) , Colfax Corporation (CFX - Free Report) and Stanley Black & Decker, Inc. (SWK - Free Report) .

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