Investing in lithium batteries is an easy-to-understand thesis. Electric cars use lithium batteries, so you’re investing in the Chevrons and Exxons of tomorrow by investing in companies that produce batteries. That’s a good theory, but it’s not so easily executed on. Do you invest in the raw materials like lithium? We’ve always advised against that, and so far we haven’t missed out on much – yet. Then there are The 8 Biggest Lithium Battery Stocks of 2028 which we denounced as not being pure-play enough, and the energy storage SPACs that emerged in 2020 which should be avoided because they’re SPACs. Then, we wrote about 3 Mid-Cap Global Battery Manufacturer Stocks, and one stood out above the rest – EnerSys (ENS).
About Enersys Stock
Pennsylvania’s own EnerSys and its predecessor companies have been manufacturers of industrial batteries for over 125 years. Today, the company serves over 10,000 customers in 100 countries as “the recognized global leader for stored energy solutions and systems.” Over the years, EnerSys has been consistently acquiring other energy storage companies (34 in the past 17 years) and growing revenues at a consistent pace. Over the past ten years, revenues grew at a respectable compound annual growth rate (CAGR) of +10%:
The company operates in two primary areas with each contributing about 50% of overall revenues:
- Reserve Power Products – used for backup power for the continuous operation of critical applications and highly integrated power solutions and services to broadband, telecom, renewable, and industrial customers.
- Motive Power Products – provide power for electric industrial forklifts, other material handling applications as well as mining equipment, diesel locomotive starting, and other rail equipment.
EnerSys has a global 22% market share across both segments combined. Companies that are leaders in the markets they play in become increasingly difficult to displace as their market share grows. In the Motive Power Products segment specifically, EnerSys enjoys a 32% global market share and over 50% of North American market share.
The company’s last 10-K hints that lead-acid batteries are a big part of the energy storage products offered by EnerSys (half of cost of goods sold (COGS) is raw materials and lead is the biggest input). We were unable to tell how much exposure we’re getting to lithium batteries, but they’re said to be launching “best-in-class modular lithium systems” across both segments which they say “provide growth & margin opportunities .”
The current investor deck pushes all the right buttons for a tech investor. With 5G being deployed across the country, 5 million small cell sites will need to be built which require energy storage solutions – a $2 billion total addressable market (TAM). EnerSys holds “leading share” for broadband critical network power, and that’s where they expect another $1.5 billion TAM associated with the 5G rollout. So, 5G represents a $3.5 billion potential opportunity for EnerSys.
Then there’s all the energy storage solutions needed for renewable energy sector. The sun doesn’t shine at night, and the wind doesn’t blow 24/7, so energy storage is a big part of renewable energy. For some reason, investors love the renewable energy storage thesis, but always look to exotic solutions for some breakthrough – flow batteries being a good example. Grid storage is 90% lithium ion right now, so we’re not sure how viable this growth driver is. An article last year by Utility Dive talks about how the $27 billion lead-acid battery market in the United States is trying to innovate its way towards better competing with lithium. The piece talks about how lead has a better safety profile than lithium, and it’s also easier to source the primary raw material:
Another advantage is that lead batteries are mostly lead, a common material, and thus do not run into the difficulties of obtaining lithium from China and elsewhere, that has concerned the battery storage industry.
The company’s turnkey energy solutions for data centers also provide us a way to play the growth of big data.
The EnerSys 10-K talks about how competitive the energy storage space is, and that’s why we also want to consider investing in an ETF as an option to cherry-picking a pure-play energy storage stock.
The Global X Lithium ETF
The last time we looked at the Global X Lithium ETF in late October, it had around $800 million in assets under management (AUM). Today, that number exceeds $3 billion, which means investors are finding compelling thematics outside of the provider that dominates the headlines these days, ARK Invest. It also shows that investors believe the current Global X Lithium ETF (LIT) constituents provide good exposure to the lithium growth thesis. Just over one-third of LIT is now comprised of Chinese stocks, a major change since we first looked at the ETF five years ago. Still, the top ten constituents of the ETF contain names that don’t mesh well with our own energy storage thesis.
We don’t want to invest in lithium mining companies – Albemarle, Ganfeng, and Quimica – because mining is a risky business subject to the whims of supply and demand. We also don’t want to invest in conglomerates with no pure-play exposure – Samsung and Panasonic – nor are we looking to invest in electric vehicle manufacturers – Tesla and BYD. In short, the top-ten stocks in the Global X Lithium ETF don’t seem to mesh well with our target thesis which is energy storage solutions.
The reason we’re bringing up LIT is because we need to decide if we’re going to take a diversified approach to investing in energy storage or put our chips on the one compelling battery stock we’ve found thus far – EnerSys. While it’s rare that we don’t find a Global X ETF appealing, we’re going to pass on LIT. That leaves us with one energy storage stock that stands out among the rest.
EnerSys Stock Pros and Cons
Overall, EnerSys presents investors with a low-risk way to play energy storage which doesn’t appear to be overvalued using our simple formula – market cap / annualized revenues. Here are those calculations for some of the companies we’ve talked about today (the lower the number, the better the valuation, the smaller the growth expectations).
- Tesla (723 / 43) = 16.8
- Albermarle (18.9 / 3.52) = 5.4
- Samsung SDI (46 / 13) = 3.53
- BYD (544 / 207) = 2.63
- EnerSys (4 / 3) = 1.33
We’re considering a position in EnerSys because of the following reasons:
- Pure-play mid-cap energy storage stock
- Provides low-risk exposure to multiple tech growth areas – data centers, electric industrial vehicles, 5G infrastructure, and renewable energy storage (maybe)
- Diversified consumer base and revenue streams
- 10-year history of double-digit revenue growth
- Seems fairly valued using our rudimentary valuation ratio
When we talk about a “good” battery stock, that’s what we’re referring to.
Never fall in love with a stock. For every position we hold, we always want to have a (hopefully short) list of concerns. Here are some concerns for EnerSys:
- Dividend – about a 25% payout ratio right now, but we’d rather they spent that money on fueling growth or reducing debt.
- Debt – A billion dollars in debt is a concern, but that’s offset by over $300 million in cash, and they’re profitable and acknowledge the debt as a risk.
- “Slow” revenue growth forecast – They say both their main segments will be growing at a +6% CAGR until 2025.
- Low exposure to lithium batteries – we’re unable to tell how much exposure we’re getting to lithium batteries but suspect the majority of their revenues come from lead-acid batteries.
Growing revenues at a double-digit CAGR for the past 10 years makes us think EnerSys has the capability to grow into something much bigger. The forecast of 6% revenue growth until 2025 is kind of shite, but we never pay much attention to forecasts. That forecast would have them clearing $4 billion in revenues by 2025, so that’s the benchmark we’re hoping they beat.
For risk-averse investors who want a pick-and-shovel energy storage play on 5G infrastructure growth, data centers, and electric industrial vehicles without over the moon valuations, the stock seems to fit the bill. Sure, it may be overexposed to lead batteries, but does it really matter if they use lead or lithium? The below slide shows how it doesn’t matter from the customer’s perspective.
Transitioning to lithium where it makes sense is part of the EnerSys roadmap, so we’re confident they’ll know what type of battery works best for the various use cases they address. This mid-cap stock provides steady growth that provides some diversification against “the ARK effect.”
Our readers have shown a strong interest in energy storage, so we’d like to have a dog in the race. The thesis is compelling enough, but there aren’t many pure-play stocks out there. EnerSys is the only entrant on our short list of energy storage stocks. We’re going to have our over-worked research team vet the latest list of stocks in the Global X Lithium ETF to see if there are any other compelling names, else we may just start accumulating this low-risk play on energy storage.
Did we decide to add EnerSys to our tech stock portfolio? Or another lithium battery stock we’re hiding under our sleeve? Become a Nanalyze Premium annual subscriber today and find out.
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