2023-12-28 16:58:16 ET
Summary
- EPAC reported a 1.8% rise in net sales for Q1 FY24, driven by growth in its industrial tools & services segment.
- Despite strong margin improvement and increased profitability, EPAC's slow sales growth is a concern for investors.
- EPAC's balance sheet shows a negative CFO and increased long-term debt, making it an uncomfortable investment choice. Technical chart looks solid, but not enough to justify the investment.
Enerpac Tool Group ( EPAC ) provides industrial products and solutions worldwide. EPAC recently announced its Q1 FY24 results, which I will analyze in this report. The technical chart of EPAC looks solid. The price has given a solid breakout. However, despite the breakout, I am not comfortable investing in it, and I will discuss the reasons behind it. For now, I am assigning a hold rating on EPAC.
Financial Analysis
EPAC recently posted its Q1 FY24 results . The net sales for Q1 FY24 were $141.9 million, a rise of 1.8% compared to Q1 FY23. Its industrial tools & services segment sales grew by 7.6% in Q1 FY24 compared to Q1 FY23. Its product and service revenues were up by 4.2% and 10.1% in Q1 FY24 compared to Q1 FY23, which was the main reason for the sales rise. Higher pricing was also one of the main factors behind the sales growth. Its gross margin for Q1 FY24 was 52.3%, which was 48.7% in Q1 FY23. The major reasons behind the significant margin improvement were volume leverage and favorable sales mix.
Its net income for Q1 FY24 was $17.7 million, which was $7.4 million in Q1 FY23. The company overcame the slow sales growth with strong margin expansion and increased profitability, but still, the slow sales growth is a concern. The management has provided sales guidance for FY24, which is around $598 million, and the FY23 sales was $598 million. So, the expected stagnant sales growth is a concern that can adversely affect its financials and its share price in 2024. However, there are some tailwinds that might help it boost its sales in FY24. A considerable amount of their sales comes from the infrastructure market in the U.S. and internationally. Many of the countries in which they serve have been focusing on their infrastructure and have been increasing their spending on infrastructure development, like the U.S., China, Japan, and India, which might be beneficial for them in the coming quarters.
Technical Analysis
EPAC is trading at $32.4. The technical chart of EAC looks solid, and this stock is looking solid long term based on the technical chart. The stock price has broken a resistance zone of $30, and the breakout has happened in a monthly time frame. The breakout of the $30 level is quite significant because the stock has been trying to break the $30 level since 2016. It tried to break it four times since 2016 but failed miserably. So the breakout has happened after seven years. Hence, I think we might see fresh momentum in the stock in the coming times.
Should One Invest In EPAC?
Their quarterly results were decent. The margin improvement and increased profitability were impressive, but they still have to work on the sales growth. A stagnant sales growth number won’t help strengthen the company’s financials much, even if the margin improvement is significant. In addition, their balance sheet doesn’t look quite good. The CFO by the end of September 2023 was negative $6.6 million, which was $17.5 million in September 2022. So, the negative CFO is a concern, and their long-term debt has increased to $240.1 million from $210.3 million. So, I would not be comfortable investing in EPAC after looking at their balance sheet. Now, talking about EPAC’s valuation. EPAC is trading at a P/E [FWD] ratio of 23x, compared to the sector median of 22.70x. So EPAC is trading at a higher multiple than the industry standards, and considering its future growth forecast, I don’t think it would be able to sustain high valuations. The only thing that looks good now is the technical chart of EPAC. It has given a solid breakout, but one cannot just invest in a company based on technicals. Hence, for now, I assign a hold rating on EPAC due to its slow growth rate, weak balance sheet, and high valuation.
Risk
Customers in the midstream and downstream oil and gas industries provide a percentage of their revenue. Changes in the oil demand, as well as disruptions in the oil and gas markets (like those brought on by the COVID-19 pandemic, the conflict in Ukraine and Russia, and the international sanctions that followed), can have a negative impact on oil prices and cash flows for a large number of those customers. This has led to, and may lead to, lower capital expenditures, project modifications, delays, or cancellations by those clients. It has also decreased demand for some of their products that serve that end market, which could have a negative impact on their financial situation and operational results.
Bottom Line
The technical chart of EPAC looks solid. The price has given a breakout after several years. However, the technicals are not backed by the company's financials and fundamentals. Its balance sheet looks dicey, and the sales growth isn't strong. Additionally, its valuation looks a bit high. So, I would not be comfortable investing in it just based on the price chart. Hence, I assign a hold rating on EPAC.
For further details see:
Enerpac Tool Group: Solid Price Chart But Not Backed By The Financials