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EnerSys Struggles with Lead Price Volatility & Currency Woes

Zacks

EnerSys ENS entered fiscal 2018 on a drab note, having slashed its bottom-line guidance concurrent with the fourth-quarter fiscal 2017 results, released late in May. The Industrial battery manufacturer warned investors that lead price fluctuations, among other factors, are likely to erode its profitability substantially in the short run.

Expectedly, the stock has lost 8.9% in the past six months comparing unfavorably with the Zacks categorized Machinery-Electrical Market’s average gain of 8.2%. Also, earnings estimates have moved south in the past couple of months, indicating bearish analyst sentiment.

The Zacks Consensus Estimate for fiscal 2018 earnings moved down from $5.02 to $4.89, over the past 60 days, led by two downward revisions versus none upward. Read on to find the major factors thwarting the company’s growth and why it may be a prudent decision to avoid the stock at the moment.


Factors Weighing Down

In the past, EnerSys has struggled to offset the volatility in cost of commodities. This had led to massive fluctuations in its selling prices. About 35% of its revenues are subject to agreements, which adjust pricing of lead to a market-based index. Presently, fluctuations in lead prices are putting pressure on the top line and margins significantly. The constant increase in the prices of lead and other raw materials – including steel, plastic and copper – are inflating the company’s cost of goods sold.

To make matters worse, customers are placing more orders at old price levels. Though EnerSys has already initiated price increases to offset this lead price growth, the desired effects are taking longer than anticipated to take hold. On account of these factors, the company expects gross profit rate in the first fiscal quarter of 2018 to decline to approximately 26%.

In addition, strengthening of the U.S. dollar against foreign currencies is adding to EnerSys’ woes. Around 60% of the company’s net sales are sourced from outside the U.S., which renders it vulnerable to fluctuations in exchange rates. During the fiscal fourth quarter, currency fluctuations had a negative impact of 6% and 1% on sales in Europe and Asia, respectively.

This apart, this Zacks Rank #4 (Sell) company also has to contend itself with seasonal trends, which are likely to hit volumes in the fiscal first quarter fiscal 2018 results. Also, we believe stiff competition from other battery manufacturers and substitutes are likely to exert pricing pressure for the fiscal year. The ongoing trend of consolidation among industrial battery purchasers is likely to magnify pricing pressures.

Stocks to Consider

Some better-ranked stocks in the industry are listed below:

Barnes Group Inc. B has a solid earnings surprise history for the trailing four quarters, having beaten estimates each time for an average beat of 8.9%. It holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

ACCO Brands Corporation ACCO has a positive average earnings surprise of 79.7% for the last four quarters, beating estimates all through. It holds a Zacks Rank #2.

With three beats over the trailing four quarters, Donaldson Company, Inc. DCI has a positive average earnings surprise of 3.9%. The company holds a Zacks Rank #2.

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