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EnerSys, Inc. - Thoughts on Power

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November 15, 2010 – Comments (2) | RELATED TICKERS: XIDEQ , ENS

Power. We simply can’t function without it. The world is trying to come up with a host of different ways to produce it that are less invasive for the atmosphere. Eventually, the world may get there.

Regardless, there will still be a need for power in places the world simply can’t go. Submarines come to mind, as do race cars, coal mines, automobiles, airplanes, and ships. All of these things require power to be able to do the things they do.

As brilliant as we wish we were, we simply don’t sit around thinking about power. Like many investors we need something to steer us in a specific direction, which in the case of power, came from one of our private money management clients.

They were requesting worksheets for companies that make batteries, and while the first thing that may come to mind for many of us when we think of batteries is the Energizer Bunny, that wasn’t what our client was interested in.

In the end, we sent our client a worksheet for EnerSys, Inc. (NYSE: ENS), as well as a worksheet for Exide Technologies, Inc. (Nasdaq: XIDE). Nor were we surprised when several days later, we were asked for a report on EnerSys, Inc.

Basis

Financial information presented in this report for EnerSys, Inc. is based on the company’s most recent SEC Form 10-K filing for year ending March 31, 2010, as filed with the Securities and Exchange Commission on June 01, 2010.

What They Do

With approximately 7800 employees, the company is the world’s largest manufacturer, marketer and distributor of industrial batteries, with additional interests in the manufacture, marketing and distribution of related products such as battery chargers, power equipment and battery accessories, in addition to providing related after-market and customer-support services for industrial batteries.

The company markets and sells its products globally to over 10,000 customers in more than 100 countries through a network of distributors, independent representatives and their own internal sales force focusing on two primary industrial battery product lines: reserve power products and motive power products.

Reserve power products are used for backup power for the continuous operation of critical applications in telecommunications systems, uninterruptible power systems, or UPS, applications for computer and computer-controlled systems, and other specialty power applications, including security systems, for premium starting, lighting and ignition applications, in switchgear and electrical control systems used in electric utilities and energy pipelines, and in commercial aircraft and military aircraft, submarines, ships and tactical vehicles.

Motive power products are used to provide power for manufacturing, warehousing and other material handling equipment, primarily electric industrial forklift trucks, mining equipment, and for diesel locomotive starting, rail car lighting and rail signaling equipment.

The company operates in three geographic regions, the Americas, Europe and Asia. Its business is highly decentralized with manufacturing locations throughout the world. More than half of its manufacturing capacity is located outside of the United States, and approximately 60% of its net sales were generated outside of the United States.

The company and its predecessor companies, have been manufacturers of industrial batteries for over 100 years with their reserve power batteries marketed and sold principally under the PowerSafe, DataSafe, EcoSafe, Hawker, Genesis, Odyssey, Varta, Oerlikon Battery and Cyclon brands.

The company’s motive power batteries are marketed and sold principally under the Hawker, EnerSys Ironclad, General Battery, Fiamm Motive Power, Douglas and Express brands.

Short-Term Investment

The stock closed recently at $29.27 with resistance at $29.90, a 2% increase from a recent close, and support at $25.73, a 12% decline from a recent close.

The stock has been in an uptrend since the first week of September, and while the stock price may well continue it’s upward trend, we think basis its current overbought condition, that a pullback in the stock price is very likely.

Long-Term (5 Year Hold) Investment

Overall of the financial metrics we follow, those of EnerSys were about average. While the company’s Current Ratio at 2.13, Quick Ratio at 1.39, and Cash Ratio at 0.48, were encouraging, what we found outstanding was the company’s Free Cash Flow at $7.74 per share.

On the downside, the company’s debt at $7.18 per share, we felt is excessive. Nor were we impressed with the company Goodwill and Intangibles at almost 25% of Total Assets.

Valuations

Based on our review of the company’s latest annual financial information, our Reasonable Value Estimate for the stock assuming a 5-Year hold is $53, with a Buy Target of $31.50, a First Sell Target of $62, and a Close Target of $65.

The stock is currently trading at slightly more than 5 times FY10 earnings, and 4 times Tangible Book Value. At current levels the price has an Enterprise Value of $32 per share, and when the debt is backed out the Equity Value is $26 per share.

With EBITDA at 8.25% of sales, and Enterprise Value at $32 per share, the Merger and Acquisition return period works out to roughly 4 years, assuming EBITDA stays at current levels, perhaps making the company a potential takeover candidate.

Final Thoughts

Over the past several years, management has adopted an aggressive approach to acquisitions, acquiring Keystone Mountaineer Power Systems, Inc., a leading battery supplier to the mining industry, the industrial battery businesses of the Swiss company Accu Holding AG, and the industrial battery business of Douglas Battery Manufacturing Company of Winston-Salem, North Carolina.

In addition, the company recently announced finalization of plans to construct a new 400,000 square foot facility in China, where it has manufactured batteries for over 20 years.

The company is also working with the Chinese government to supply batteries for six nuclear power plants, a potential $150M contract award.

In August, the company was awarded a $39M contract to supply submarine batteries and earlier this month the company was awarded a $38M contract for storage batteries.

So while batteries may not seem like stimulating investment conversation to most of us, over the years we have come to appreciate that when it comes to certain arm’s length transactions, they can be very stimulating indeed.

Wax

2 Comments – Post Your Own

#1) On November 15, 2010 at 3:23 PM, EnigmaDude (92.69) wrote:

Excellent analysis but the amount of debt is scary.  If they win the Chinese contract that would cause me to reconsider, but given your analysis I would be hesitant to buy at this price.

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#2) On November 15, 2010 at 8:22 PM, wax (97.05) wrote:

EnigmaDude;

You're right about the debt, and in reading through the 10-K, we got the sense that management knew the company was out of balance with the amount of debt, but really didn't put any plan forward for debt reduction.

The China contract aside, the two contracts for submarine batteries will help as these seem to be higher margin items. But you nailed it, the company does need to reduce its debt.

Wax

 

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