Royce & Associates now owns 2.7 million shares of EnerSys (NYSE:ENS), according to a recent 13G filed with the SEC. This is up from 2.5 million shares at the beginning of October (find more stocks Royce owned at the time) and gives the fund 5.5% of the total shares outstanding. Royce & Associates, managed by Chuck Royce, tends to focus on taking relatively large percentage stakes in small-cap and mid-cap companies and so is one of the easiest funds to track through SEC filings.
EnerSys is a $1.9 billion market cap manufacturer of industrial batteries which are generally used as reserve power systems. The company’s 10-Q for the second quarter of its fiscal year (the quarter which ended in September) shows a 1% increase in revenue compared to the same period in 2011. However, improved gross margins- cost of goods sold went from 79% of revenue to 75%- caused the net margin to rise from 5% to 8%, and as a result earnings per share were 90 cents as opposed to 57 cents a year earlier.
We doubt that Enersys can get sustainable earnings growth from improving its margins, but it actually doesn’t need to grow its earnings by much in order to be a good value. The trailing P/E is only 11, even after the stock has been up 42% in the last year. That multiple is low enough that only modest improvements on the bottom line would make the stock undervalued from our perspective. Analyst consensus places Enersys’s forward P/E at 10.
Royce was by far the largest hedge fund holder of Enersys stock at the end of the third quarter out of all the funds and other notable investors we track in our database of 13F filings. Dreman Value Management, which is managed by David Dreman, owned about 800,000 shares of the stock (see more stocks Dreman owns). Renaissance Technologies, whose success since inception has made founder Jim Simons a multi-billionaire, increased its stake to about 330,000 shares though this was a very small position for the large hedge fund. Check out Renaissance Technologies’ favorite stocks.
Peers for Enersys would include Exide Technologies (NASDAQ:XIDE), Regal-Beloit Corporation (NYSE:RBC), Nidec Corporation (NYSE:NJ), and Littelfuse, Inc. (NASDAQ:LFUS). Exide, a battery maker whose products are used in automotive and industrial environments, is actually unprofitable on a trailing basis and its revenue was down 8% in its most recent quarter compared to the same period in the previous year. The company is highly leveraged, though analyst expectations (the sell-side is generally bullish on auto related companies) imply a forward P/E of only 5. We’d avoid the stock, though at that multiple it’s possible that Exide would be a way to express optimism on the auto industry.
The other three comparable companies have trailing earnings multiples clustered in the 15-17 range, so they are priced at a premium to Enersys. In addition, Littelfuse has actually been seeing slightly lower revenue and earnings than a year ago; at the highest forward P/E of these five companies, we don’t think that it is a buy. Net income has been up nicely at Regal and Nidec, though at a lower rate than Enersys experienced. Of course, we’d noted that Enersys wasn’t getting much revenue growth and so its earnings growth might not be sustainable. Investors may want to investigate Regal and Nidec to see if these companies face similar concerns, and even if they do not they are considerably more expensive than Enersys in any case.
EnerSys isn’t an exciting company, but the market is pricing it quite cheaply. Some of its peers might have more reliable earnings growth, though their earnings multiples are considerably higher. Even if the growth rate slows down at EnerSys it might still be a good value and so we think Royce may have made a good decision here.
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