The recent travails of the oil industry, not to mention the upheavals in coal, are in part a response to a growing desire among governments and even consumers to shift to alternative, cleaner energy sources. That desire is clear, but the actual shift to alternative energy has been fairly slow in coming. That is in some respects a structural issue, coal and oil fired power stations cannot be converted overnight, but there is also a practical problem shared by most alternative energy sources: storage.
Neither wind nor solar energy can be turned on and off at will. The power must be generated when the wind is blowing or the sun is shining and then stored for future use. There are several innovative projects out there to solve that particular problem, such as the underwater balloon storage system developed by the private Canadian company Hydrostore, but for now batteries of some kind still offer the most efficient solutions.
It makes sense then, in a world that is moving inexorably away from fossil fuels and towards natural, and therefore stored, energy, to invest in a company that specializes in the field of energy storage. EnerSys (ENS) is one such company.
To be clear, energy storage systems for utilities are not big revenue contributors for EnerSys right now. They are currently focused on motive power (batteries and fuel cells for truck and bus fleets) and the storage side of the business is more about smaller scale storage needs such as in the telecom business, but their experience and technical know-how leave them ideally placed to take advantage as alternative energy production grows.
When looking to play a long term idea such as this, it is important that investors consider the short to medium term prospects of the company too. It will take time for the benefits of possible increased demand for storage from utilities to have an effect on business, so some positive impetus in the short term is needed to protect the investment. For EnerSys that comes from growing business in China. As that country moves to the 4G phone system, EnerSys is increasing business there.
Add that to margin expansion from some rationalization and continued growth in the motive power segment, the immediate future for EnerSys looks positive. In the medium term, the industry is going through a period of consolidation, so M&A activity is always possible. With a strong balance sheet, lots of free cash flow and plenty of cash on hand, ENS will probably be a major player in that area before too long.
ENS is even attractive from a very short term, technical perspective too. Zooming in on the chart shows a rapid recovery from the lows, and, when corrections have come, a pattern of higher lows each time. As long as we stay above 53.09, that pattern is intact and the positive momentum from the break of the 50 day exponential moving average can be maintained.
As always, there are risks. A Republican win in this year’s Presidential election would shift the focus in the U.S. away from alternative energy, for example, but even then, the rest of the world will still be moving forward. The M&A prospects mentioned above could also prove to be a downside if EnerSys were to target the wrong company or get involved in a protracted buyout battle, but to date the company’s management has shown good judgment and there is no obvious reason why that would change. In short, a confluence of short and long term fundamental positives and a decent technical setup make ENS look like an opportunity too good to miss.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
