EnerSys (ENS): Post-Earnings Valuation Undervalues Growth Catalysts Ahead

Investors often overlook the power of compounding margin improvements and secular tailwinds in industrial sectors. EnerSys (ENS), a global leader in stored energy solutions, has just delivered a fourth-quarter earnings report that underscores its resilience in a challenging macroeconomic environment. With a stock price hovering at $93.11 as of May 23, 2025, the market has yet to fully price in the company's structural advantages—margin expansion, diversified end-market exposure, and a disciplined capital strategy—that position it for outsized returns.

Valuation: A Bargain at Current Levels

EnerSys' recent results reveal a company executing flawlessly in its core markets. Let's break down the metrics:

1. Revenue Growth: Fourth-quarter sales hit $975 million, a 7% year-over-year increase, marking the second-highest quarter in EnerSys' history. Full-year revenue of $3.6 billion reflects steady progress despite lingering supply-chain headwinds.
2. Margin Expansion: Adjusted gross margin jumped 320 basis points to 31.2%, driven by cost discipline and a shift toward higher-margin products like maintenance-free batteries in the Motive Power segment (29% of sales now).
3. Free Cash Flow: $105 million in Q4, supported by robust operating cash flow of $135 million, underscores EnerSys' ability to generate liquidity even in volatile environments.

The stock's valuation metrics scream undervalued. At $93.11, EnerSys trades at:
- 13.5x trailing adjusted EPS ($6.89 in 2025, excluding one-time tax benefits), below its 5-year average of 15.2x.
- 7.3x EV/EBITDA (using a full-year 2025 EBITDA of $558.6 million), a stark contrast to peers like C&D Technologies (CHMI) at 12.1x.

Growth Catalysts: Three Pillars of Future Outperformance

1. Data Center & Communications Demand

EnerSys' Energy Systems segment grew 8% to $399 million, fueled by hyperscale data center investments and a recovery in telecom infrastructure spending. With 5G rollouts and AI-driven compute demands surging, this segment is primed for sustained growth.

2. Margin Leverage in Motive Power

The Motive Power division—critical for industrial and motive applications—remains resilient despite flat revenue. Margins expanded to 17.1%, thanks to a strategic pivot toward maintenance-free batteries (up 29% of sales). This shift reduces reliance on volatile commodity markets and positions EnerSys as a premium supplier in its niche.

3. Aerospace & Defense Upside

The Specialty segment's 21% revenue jump to $178 million (aided by the Bren-Tronics acquisition) signals a breakthrough in high-margin markets. With U.S. defense spending at record levels and commercial aerospace recovery, EnerSys is well-positioned to capitalize on long-term demand.

Strategic Initiatives: A Playbook for Long-Term Dominance

• Restructuring Gains: The $19 million annual pretax savings from Project Reboot (to be realized by 2027) will further compress costs and boost margins.
• M&A Opportunities: CEO Shawn O'Connell has signaled a renewed focus on tuck-in acquisitions in Aerospace & Defense, leveraging EnerSys' $343 million cash balance and low leverage ratio (1.3x net debt/EBITDA).
• Leadership Transition: O'Connell's focus on energy security and labor scarcity solutions aligns with global trends, from grid resilience to automation-driven industrial growth.

Risks? Overcome by Prudent Management

The pause in full-year 2026 guidance due to tariff uncertainties is valid, but note that:
- EnerSys' $107 million tax refund delay (now resolving with interest) was an administrative hiccup, not a structural issue.
- Management has already factored $92 million in tariff exposure into Q1 2026 forecasts, with plans to offset costs via pricing and productivity gains.

The Bottom Line: Buy Now, Reap Later

EnerSys' valuation is grossly inconsistent with its earnings momentum and secular growth drivers. At $93, the stock offers a 35% upside to my 12-month target of $125, based on a 15x multiple on 2026 EPS of $8.33 (factoring in margin expansion and restructuring benefits).

Investors should act swiftly: EnerSys' catalysts are too compelling to ignore. The next earnings report—likely to beat expectations—could ignite a rerating that leaves latecomers in the dust.

Recommendation: Buy ENS immediately.