EnerSys

Moat: 3/5

Understandability: 3/5

Balance Sheet Health: 4/5

EnerSys is a global leader in stored energy solutions, designing, manufacturing, and distributing a wide range of industrial batteries and related products.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

EnerSys operates primarily within the motive power and reserve power segments. Motive Power includes batteries for electric forklifts, mining equipment, and other material handling applications. Reserve Power focuses on batteries used in power plants, telecommunications infrastructure, data centers, uninterruptible power supplies (UPS), and other critical infrastructure.

Revenue Distribution:

  • Energy Systems (including telecom and datacom power supplies, energy storage systems for utilities): $3.352 billion in fiscal year 2023.
  • Motive Power (includes commercial and industrial batteries, chargers, and accessories): $1.162 billion in fiscal year 2023.

The company serves various sectors including industrial, commercial, and government entities across a global footprint with operations across the Americas, EMEA, and Asia Pacific.

Industry Trends:

  • The global energy storage industry is in a state of transition, with increased demand for battery solutions driven by growth in electric vehicles (EV), renewable energy infrastructure, and the need for reliable power backups for critical infrastructure.
  • Geopolitical events as well as the pandemic have significantly disrupted global supply chains. While the supply chain issues seem to have improved, there is no guaranty they won’t re emerge.

Competitive Landscape:

  • The industrial battery market is competitive, with a mix of large global players and smaller regional suppliers.
  • Key competitors include Johnson Controls, Exide Technologies, EnerSys operates through different market channels, distributors, direct sales teams and value-added resellers.

What Makes EnerSys Different?

  • Wide range of battery technologies including lead acid, VRLA, and lithium-ion solutions.
  • Diversified end-market exposure, mitigating risk from any single end-user.
  • Strong brand recognition in the industrial battery market, built through decades of operation.
  • Ability to offer both standardized and customized solutions.
  • A global supply chain for raw materials and components, as well as a broad manufacturing network across the world.

Financials Analysis

Income Statement:

  • Revenue Growth: In fiscal year 2023, EnerSys’s net sales were $3.552 billion, an increase of 16.8% over the previous year with a mix of volume growth and price increases. The growth has been strong across its segments, with a slight decline in specialty segment, which is due to supply chain difficulties.

  • Gross Profit: The company’s gross profit rate was 28.2% which is a 430-basis point improvement over 2022. This is primarily due to price increases.
  • Operating Income: The operating income in 2023 is $474.2 million, and that is up $109 million YoY, driven by better top-line growth, improved margins and more effective cost management strategies
  • Net Income: Net income is at $317 million, reflecting improved performance, as well as a reduction in interest expense.

  • Earnings Per Share (EPS): Diluted earnings per share in 2023 is $7.32.

  • Margins: In the recent past there has been continuous improvement in margins, a result of various internal efficiencies, better pricing power, and the end of several supply chain issues. However, if inflation persists or supply chain issues worsen, the margins can come under pressure.

Balance Sheet:

  • Cash and Cash Equivalents: $168 million (as of March 31, 2023).
  • Total Debt: $1.908 billion, with a target debt-to-capitalization of 50-55%. Company is currently above that.
  • Net debt: is approximately $1.74B
  • Shareholder’s Equity: $1.714 billion.

The company has a decent amount of debt on its balance sheet, this must be considered a concern. However, current metrics and projections show a continued ability to comfortably repay its debt obligations. Also, the company has a clear strategy in place to reduce its debt in future periods.

Cash Flow Statement:

  • Strong operating cash flows due to increased profitability and good inventory management.
  • Free cash flow (FCF): is at $330 million, indicating a robust capacity to fund future plans and returns to investors.

  • The company uses some of it’s free cash flow to pay debt.

  • Capital Expenditure: CapEx was at 8.9 % of total revenues.
  • It is important to understand whether this capital expenditure is a long-term investment for growth or to sustain existing business.

Concerns and Management Discussion

  • Management recognizes that while supply chain challenges are diminishing, it’s not fully predictable as to when they will completely end. They are focused on managing costs through these supply challenges.
  • There is also a focus on managing pricing, and they will keep using price as a tool to improve margins.
  • Management will continue to optimize capital allocation and focus on organic growth with some potential for acquisitions as well, especially in the battery space.

Moat Analysis

EnerSys demonstrates a moderate moat (3/5) based on the following factors:

  • Switching Costs: Switching costs in the motive power segment are considerable. Customers, such as industrial forklift users, tend to stick with a particular supplier because of the need for specialized installation, servicing and maintenance contracts. These services tie the client to the provider, since most companies are hesitant to take chances on a new provider due to the importance of the operations.
  • Established Relationships: The company has strong relationships with industrial clients. They have long term business, are used to their service and quality and do not prefer to switch to other competitors due to these reasons.
  • Scale and Distribution: The company has invested in a distribution network that covers much of the global market, with significant manufacturing facilities and distribution centers in key industrial regions, creating some cost advantages.

However, the moat isn’t as strong as it could be and comes with these weaknesses:

  • Limited Product Differentiation: While EnerSys provides a range of batteries, it is hard to differentiate industrial batteries from each other. Most batteries use the same chemistries and hence do not constitute a defensible moat.
  • Competition: The market is still open to new entrants and can be easily disrupted by technological changes or new innovations that a current provider may not be able to adapt to.

Risks to the Moat

Several factors could weaken EnerSys’s competitive position:

  • Technological disruptions: In the fast-evolving energy storage industry, technology could change rapidly and lithium-ion technologies may cause a displacement of lead acid. A failure to innovate or adapt to new technology can harm profits.
  • Increased Competition: New competitors entering the industry from both within and outside the battery space can cause price and margin compression.
  • Supply chain disruptions: If global supply chains face greater challenges than they have faced until now, this can affect the company’s ability to source raw materials and to deliver products.
  • Economic Fluctuations: The demand for industrial batteries is linked to economic activity, so recessions could significantly impact their revenues and profitability.

Business Resilience:

  • Diversified Customer Base: The company serves diverse segments and has a large global footprint, reducing its reliance on any single customer or region.
  • Established Product Lines: Although the company has invested in new battery technologies, their core business has been in lead-acid batteries. This existing line of business creates a stable and consistent demand and offers a level of stability to revenues.
  • Service Revenue: Beyond product sales, they have a recurring revenue stream generated from servicing and maintenance agreements, which provide a measure of revenue resilience.

Understandability Rating: 3 / 5

EnerSys’s business model is moderately complex. While the underlying technology is based in core chemistry, the specific application across many different products and industries can be difficult to understand. The company’s global reach, different geographies and complex value chains also contribute to the complexity. Though the basics of the business are easy to understand, the intricacies make it less transparent overall.

Balance Sheet Health: 4 / 5

EnerSys has a good but not excellent balance sheet health. Current assets are roughly double of current liabilities which is a good indication of short term solvency. However, their debt-to-equity ratio is high, creating increased financial risk for shareholders. They have maintained great revenue growth and have good cash flows, which helps alleviate concerns about their debt position. They have been paying off debt slowly for many years. Their management team is competent in that aspect and there seem to be no concerns.