Returns On Capital Are Showing Encouraging Signs At EnerSys (NYSE:ENS)

EnerSys (NYSE:ENS), a global leader in stored energy solutions for industrial applications, has been demonstrating encouraging signs in its returns on capital. The company's strong earnings growth, revenue growth, and high return on equity have contributed to its positive ROIC trend over the past five years. In this article, we will explore the factors driving EnerSys' returns on capital and how they compare to industry peers and historical performance.

Earnings and Revenue Growth

EnerSys has been growing its earnings at an average annual rate of 16.8%, while the Electrical industry saw earnings growing at 16.2% annually. This indicates that EnerSys' earnings growth has been slightly higher than the industry average. Additionally, EnerSys' revenue growth has been steady, with an average annual growth rate of 4.8%. While this is lower than the industry average of 9.9%, it is important to note that EnerSys operates in a mature industry with established competitors. The company's focus on innovation and expansion into new markets, such as lithium-ion batteries and energy storage solutions, may help drive future revenue growth.

Return on Equity and Net Margin

EnerSys' return on equity is 15.7%, which is a strong indicator of the company's profitability and efficiency in utilizing shareholder investments. The company's net margin of 8.2% is also slightly lower than the industry average of 10.97%. However, EnerSys' operating margin of 11.91% is higher than the industry average of 10.43%. This suggests that EnerSys is effectively managing its operating expenses and generating strong operating profits.



Factors Contributing to Returns on Capital

Several factors have contributed to EnerSys' recent improvements in returns on capital:

1. Acquisitions: EnerSys has strengthened its business through strategic acquisitions. In July 2024, the company acquired Bren-Tronics, Inc. for $208 million, which expanded its lithium product offerings and is expected to add $60 million of revenues and 25 cents of earnings per share to its fiscal 2025 results. Additionally, in April 2023, EnerSys acquired the United Kingdom-based battery service and maintenance provider, Industrial Battery and Charger Services Limited ("IBCS"). This acquisition bolstered the company's motive power service offerings and strengthened its presence in the U.K. market. In the fiscal second quarter, acquisitions boosted sales by 2%.
2. Dividend Payouts and Share Repurchases: EnerSys remains focused on rewarding its shareholders through dividend payouts and share repurchases. In the first six months of fiscal 2025, the company paid out dividends of $18.6 million and bought back shares worth $75.2 million. EnerSys also hiked its quarterly dividend by 7% to 24 cents per share in August 2024. Exiting the second quarter of fiscal 2025, the company was left to repurchase shares worth $258 million in aggregate.
3. Improved Motive Power Segment Performance: The Motive Power segment has witnessed strength, driven by increased sales of maintenance-free thin plate pure lead and lithium products. The segment's revenues increased 3% year over year in the second quarter of fiscal 2025. Management expects this segment to benefit from strength in the automation and electrification markets, which can contribute to improved returns on capital.
4. Solid Momentum in the Aerospace and Defense End Markets: The Specialty segment has seen solid momentum in the aerospace and defense end markets, with revenues increasing 9% year over year in the fiscal second quarter. This growth can contribute to improved returns on capital.

Conclusion

EnerSys' returns on capital have been showing encouraging signs, driven by its strong earnings growth, revenue growth, and high return on equity. The company's focus on acquisitions, dividend payouts, and share repurchases, as well as its improved segment performance, has contributed to its positive ROIC trend. While EnerSys' returns compare favorably to industry peers and historical performance, investors should remain vigilant and continue to monitor the company's progress. As EnerSys continues to innovate and expand its offerings, it is well-positioned to maintain and enhance its returns on capital in the long term.