3 Reasons ENS is Risky and 1 Stock to Buy Instead

EnerSys has been on fire lately. In the past six months alone, the company’s stock price has rocketed 89.8%, reaching $168.15 per share. This was partly due to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is there a buying opportunity in EnerSys, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free.

Why Is EnerSys Not Exciting?

We’re glad investors have benefited from the price increase, but we're cautious about EnerSys. Here are three reasons there are better opportunities than ENS and a stock we'd rather own.

1. Demand Slips as Sales Volumes Slide

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Renewable Energy company because there’s a ceiling to what customers will pay.

Over the last two years, EnerSys’s units sold averaged 1.5% year-on-year declines. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests EnerSys might have to lower prices or invest in product improvements to grow, factors that can hinder near-term profitability.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect EnerSys’s revenue to rise by 1.6%. While this projection indicates its newer products and services will fuel better top-line performance, it is still below average for the sector.

3. Low Gross Margin Reveals Weak Structural Profitability

Cost of sales for an industrials business is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics.

EnerSys has bad unit economics for an industrials company, giving it less room to reinvest and develop new offerings. As you can see below, it averaged a 26.1% gross margin over the last five years. Said differently, EnerSys had to pay a chunky $73.92 to its suppliers for every $100 in revenue.

Final Judgment

EnerSys isn’t a terrible business, but it doesn’t pass our bar. After the recent rally, the stock trades at 15× forward P/E (or $168.15 per share). While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better stocks to buy right now. Let us point you toward the most entrenched endpoint security platform on the market.

Stocks We Would Buy Instead of EnerSys

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