EnerSys (NYSE: ENS, Finance at 30) stock is showing all signs of modest overvaluation, according to GuruFocus Value’s calculation. The GuruFocus Value is GuruFocus’s estimate of the fair value at which the stock is to trade. It is calculated based on the historical multiples at which the stock has traded, the company’s past growth, and analysts’ estimates of the company’s future performance. If a share’s price is significantly above the GF value line, it is overvalued and its future performance may be poor. On the other hand, if it is significantly below the GF value line, its future return is likely to be higher. At its current price of $ 94.9 per share and market capitalization of $ 4.1 billion, EnerSys stock is giving all indications that it is slightly overvalued. The GF value for EnerSys is shown in the table below.
Given that EnerSys is relatively overvalued, its long-term stock return is likely to be lower than its business growth, which has averaged 4.8% over the past three years and is expected to grow 5.04 % per year over the next three to five years.
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Since investing in companies with poor financial strength could result in a permanent loss of capital, investors should carefully consider the financial strength of a company before deciding whether or not to buy shares. Examining the cash-to-debt ratio and interest coverage can provide a good initial perspective on the financial strength of the business. EnerSys has a cash-to-debt ratio of 0.42, which is worse than 73% of companies in the industrials sector. On this basis, GuruFocus ranks EnerSys financial strength at 5 out of 10, suggesting a fair track record. Here is EnerSys’ debt and cash flow over the past few years:
It is less risky to invest in profitable companies, especially those that have demonstrated consistent profitability over the long term. A business with high profit margins is also generally a safer investment than a business with low profit margins. EnerSys has been profitable 10 in the past 10 years. In the past twelve months, the company reported sales of $ 3 billion and earnings of $ 3.32 per share. Its operating margin is 8.62%, which is in line with the average for companies in the industrial products industry. Overall, GuruFocus ranks EnerSys profitability at 8 out of 10, indicating strong profitability. Here is EnerSys revenue and net income over the past few years:
Growth is probably the most important factor in the valuation of a business. GuruFocus research has shown that growth is closely linked to a company’s long-term market performance. A faster growing business creates more shareholder value, especially if the growth is profitable. EnerSys’ average annual revenue growth over 3 years is 4.8%, which ranks among the average for companies in the industrial products sector. The 3-year average EBITDA growth rate is -1.7%, which ranks among the average for companies in the industrial products sector.
Another way to determine a company’s profitability is to compare its return on invested capital to the weighted average cost of capital. Return on Invested Capital (ROIC) measures how well a business generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company should pay on average to all of its security holders to finance its assets. When the ROIC is higher than the WACC, it implies that the company creates value for the shareholders. In the past 12 months, EnerSys return on invested capital is 8.91 and its cost of capital is 8.77. The historical ROIC vs WACC comparison of EnerSys is shown below:
In conclusion, the stock EnerSys (NYSE: ENS, 30 years Financials) shows all the signs of a modest overvaluation. The company’s financial position is fair and its profitability is solid. Its growth is in the mid-range of companies in the industrial products industry. To find out more about the EnerSys share, you can consult its financial data over 30 years here.
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