ENPRO INC.

Moat: 1.5/5

Understandability: 3/5

Balance Sheet Health: 3/5

ENPRO Inc. is a diversified industrial manufacturing company, specializing in engineered products, material handling solutions, and advanced surface technologies.

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.

Enpro operates within the industrial manufacturing sector, which is generally known for its cyclicality, price sensitivity, and high level of competition, making it hard for companies to gain an economic moat. As a result, moat potential tends to reside within specific operational advantages or cost efficiencies that require special skills or assets.

Business Overview:

Enpro operates through three main segments:

Sealing Technologies: This segment offers a range of sealing solutions such as compression packing, gaskets and other sealing materials for rotating, reciprocating and static applications. The demand for these products is likely to be steady as they are critical for performance and safety in various industries.
Advanced Surface Technologies: This area focuses on coating, machining and thermal treatment of surfaces. These technologies are used for a range of reasons like corrosion protection or to improve durability and performance of products across different industries.
Engineered Material Technologies: This segment is dedicated to designing, developing and manufacturing products with specific applications across various markets, most notably for semiconductor manufacturing and processing. This segment appears to be more cyclical than the other segments based on the underlying markets.

While the products themselves are not high-end consumer or brand-name products, Enpro focuses on the engineered nature and specialty of these products, where they are made specific for a customers need and hence possess a competitive edge over more simple versions of the product.

Competitive Landscape:

Enpro competes within very diverse and fragmented industries. There are several large and smaller players in each market, some of which are leaders in specific regions.

Sealing Technologies: While there isn’t one single player dominating the market, there are several well established companies including Freudenberg, Trelleborg, and SKF, offering products comparable to Enpro’s.
Advanced Surface Technologies: Competitors range from large material and manufacturing companies, such as Oerlikon and Bodycote. Due to specialized technology and applications, competition in this segment is also less commoditized and more driven by skill.
Engineered Material Technologies: The main driver of value in the semiconductor industry has been based on technological capability and speed of innovation. Since Enpro is not a semiconductor designer, it needs to be very focused in order to compete effectively in that field.

Financial Analysis:

Revenues: Enpro’s revenues for the year 2023 totaled $1.14B showing a growth of 13.9% YoY. Revenues are not concentrated in any single sector and tend to be well spread out across their business segments, which reduces volatility from a single source or a customer.
Profitability: Enpro’s adjusted EBITDA was $309.6 million in 2023 compared to $214.3 million in 2022. The adjusted EBITDA margin improved from 21% to 26.9% during this same period. The improvements are a result of increase in sales and the results of cost control management implemented by management. The gross profit for the year 2023 came in at $503 million, a solid profit margin of 43.2%.
Cash Flow: Cash Flow from operations increased from $138.2 million to $332.3 million YoY, and Free Cash Flow was $283.1 million. The improvements were mainly attributed to increased profitability.
Capital Allocation: Enpro’s primary focus for capital deployment has been mergers and acquisitions. They spent $590.4 million on acquisitions and acquisitions related activities. In 2023, the company repurchased $100 million of its shares. They also provide a modest dividend with a dividend yield around 1%.

The company has been significantly increasing its share repurchase rate, and this is a good sign as this signals management thinks the shares are undervalued and that they will provide better value to shareholders than using it elsewhere.

Debt: The long-term debt is about $700 million, while the total assets amount to $2,690 million. Debt/equity is around 1.2, but we need to evaluate how much of that is tangible. Enpro has a history of making large acquisitions, but it should focus more on acquisitions that improve overall financial returns rather than revenue.
Capital Expenditures: In 2023, Enpro generated a free cash flow of 283 million, and also invested more than $168 million in capital expenditures, it is important to monitor if this high rate of capex continues. A higher amount of capital expenditures could cause a cash flow crunch for companies that have large debts.

Moat Assessment (1.5/5):

The competitive advantage or economic moat of a company refers to its ability to maintain a competitive edge over a long period and maintain profits against competition. There is no way a company can be considered to have a wide moat if it fails to show strong performance over a prolonged time.

While Enpro operates in many industries with decent financial and growth metrics, there are no obvious competitive advantages that make it impossible for competitors to emulate in the long term. Their business units focus on niche specialized areas of manufacturing, but these products are not that unique, even if they have unique requirements. While these aspects help create some customer lock-in and repeat sales, they are not wide or deep enough to build a strong moat.

Intangible Assets: While Enpro has various products in each segment, and some of them have proprietary designs and production methodologies, there is nothing that resembles a strong recognizable brand name or intellectual property.
Switching Costs: Customers face some switching costs as these products are specifically built for their use. The switching costs, however, do not appear to be high, as long as the company is able to provide parts that meet the needs of the customers.
Network Effect: Enpro’s products and services do not benefit from any network effects.
Cost Advantages: Enpro focuses on niche markets rather than commodity markets, so they do not seem to pursue a cost-leadership strategy. While they may have specific advantages in sourcing raw materials, it doesn’t seem like they have any sustainable competitive advantage over their competitors.
Size Advantages: While the company is quite big for a specialized manufacturer, it doesn’t have the scale to create a wide moat, especially in this industry.

Moat Rating: 1.5/5

Risks to the Moat and Business Resilience:

Economic Cyclicality: As Enpro operates in industries that depend on the health of the economy, they are highly vulnerable to economic cycles. During a downturn, the company would have a much harder time maintaining current profit levels.
Customer Concentration: While Enpro has a wide range of customers, a few key customers form a significant amount of the revenue. Loss of business with a major customer could have a severe impact on the financials.
Acquisition Integration: Enpro has grown over the years through several acquisitions. If it cannot properly integrate the businesses in terms of operations and management, it may create an environment where value will be lost. This is especially true because the company has many large acquisitions in short periods, which has the potential to put a strain on the company and its resources.
Competitive Pressures: Since there aren’t that many barriers to entry in most of their segments, it is highly likely that increased competition can erode the profit margins of Enpro over the long term, and new technologies in product manufacturing may diminish a portion of its value.
Supply Chain Vulnerabilities: As of the latest earnings report, management acknowledges problems with supply chains. If it can’t mitigate this, it could affect the ability of the company to deliver and maintain expected margins.

Business Understandability (3/5):

Understanding Enpro requires a good understanding of its different business lines, various geographical exposures, and different metrics relating to the industrial manufacturing industry. While it is easy to understand what they do, it is somewhat difficult to understand their exact competitive advantage, due to the fact that they don’t focus on a single well defined market and have a wide product range.

Understandability Rating: 3/5

Balance Sheet Health (3/5):

Enpro’s balance sheet is overall reasonably healthy. They have a net positive cash position, and have a debt/equity of around 1.2, which is not that bad considering the industry the company operates in. However, the debt is mainly short term. Their goodwill on their balance sheet is also fairly high due to past acquisitions and may hinder cash flow or cause a write-off in the future.

Balance Sheet Health Rating: 3/5

Recent Concerns, Controversies and Management Thoughts The company seems to be facing headwinds in the overall market conditions along with supply chain and inflation related issues. These issues led to slower growth in the more cyclical parts of their business along with rising costs. The company is focused on maintaining prices at the right levels while focusing on improving the financial side of the company. Management have focused on a cost cutting program that they believe will improve margins. They have also expressed they are focused on acquisitions that will add to long term value, both for growth and for synergies to improve margins, which appears to be their main business strategy going forward. In the most recent earnings report, management mentioned they still have supply chain concerns. Despite all these headwinds, the most recent reports and their commentary, they are cautiously optimistic about a return to their historical performance. While management has indicated that debt levels are not high, and they have not over-leveraged themselves, they continue to seek acquisitions which may increase the debt levels even further. The company also has a large intangible position which is primarily goodwill, so the balance sheet health is not pristine and should be kept in check.