The past six months have been a windfall for EnerSys’s shareholders. The company’s stock price has jumped 57.2%, hitting $172.45 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.
Is now the time to buy EnerSys, or should you be careful about including it in your portfolio? See what our analysts have to say in our full research report, it’s free.
Why Is EnerSys Not Exciting?
We’re happy investors have made money, but we're cautious about EnerSys. Here are three reasons we avoid ENS and a stock we'd rather own.
1. Sales Volumes Stall, Demand Waning
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful Renewable Energy company because there’s a ceiling to what customers will pay.
Over the last two years, EnerSys failed to grow its units sold. This performance was underwhelming and implies there may be increasing competition or market saturation. It also suggests EnerSys might have to lower prices or invest in product improvements to accelerate growth, factors that can hinder near-term profitability. 
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect EnerSys’s revenue to rise by 2%, close to its 4.9% annualized growth for the past five years. This projection is underwhelming and suggests its newer products and services will not lead to better top-line performance yet.
3. Low Gross Margin Reveals Weak Structural Profitability
Cost of sales for an industrials business is usually comprised of the direct labor, raw materials, and supplies needed to offer a product or service. These costs can be impacted by inflation and supply chain dynamics.
EnerSys has bad unit economics for an industrials company, giving it less room to reinvest and develop new offerings. As you can see below, it averaged a 26.3% gross margin over the last five years. That means EnerSys paid its suppliers a lot of money ($73.67 for every $100 in revenue) to run its business. 
Final Judgment
EnerSys isn’t a terrible business, but it isn’t one of our picks. After the recent rally, the stock trades at 14.5× forward P/E (or $172.45 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're fairly confident there are better stocks to buy right now. We’d suggest looking at one of our top software and edge computing picks.
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