Another Boring, Undervalued Growth Stock

by Lawrence Meyers | June 6, 2012 9:40 am

I want to own a business that sells a product that constantly must be replaced.

That’s one reason why Energizer Holdings (NYSE:ENR[1]) keeps going and going going. And that’s also the reason to own another battery company of a different stripe but almost identical ticker — EnerSys (NYSE:ENS[2]).

EnerSys manufactures, markets and distributes industrial batteries in the Americas, Europe and Asia. It also sells chargers, power equipment and battery accessories, as well as related after-market and customer-support services for industrial batteries.

These are the folks that take care of things that desperately require backup power to provide uninterrupted operations in important stuff like telecommunications, computer-controlled systems, switchgear, electrical control systems that are used in electric utilities and energy pipelines; and in commercial aircraft, satellites, military aircraft, submarines, ships, tactical vehicles and portable energy packs. You don’t want your plane to stall in midair during a bombing run because your backup power source stinks.

The company also provides motive power for manufacturing, warehousing and other material handling equipment. It sells its aerospace and defense products to the governments of the United States, Germany and the United Kingdom, and to defense and aviation OEMs. This diverse customer base ensures EnerSys isn’t beholden to changes in any given industry.

EnerSys reported a great quarter, with adjusted net earnings per diluted share up 32% on an 8% revenue jump, and a 3% sequential increase. An 18% increase in sales in the Americas drove much of this increase. For the full year, adjusted net earnings were up almost 20%. For FY13, analysts see a 15% increase in earnings, with 10% in FY14. That makes this growth stock cheap by today’s P/E ratio around 10.

An undervalued growth stock is a rare beast — but just to make sure there are no traps lurking in this forest, let’s look at the financials.

EnerSys’ balance sheet is in great shape, with $160 million in cash and $237 million in debt, with debt service at about 7% interest. ENS turned free cash flow around big time after a lackluster FY10, increasing FCF from $20 million to $156 million. Margins are solid at 6.3%.

EnerSys is exactly the kind of boring growth play I like. It’s undervalued, in a business that requires repeat purchases, and has strong cash flow. Buy ENS cheap while you can.

As of this writing, Lawrence Meyers[3] did not hold a position in any of the aforementioned securities. He is president of PDL Capital, Inc.[4], which brokers secure high-yield investments to the general public and private equity. You can read his stock market commentary at[5]. He also has written two books[6] and blogs about public policy[7], journalistic integrity[8], popular culture[9] and world affairs[10].

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  4. PDL Capital, Inc.:
  6. written two books:
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