Headwinds Sap Strength From Enerpac Tool Group

Well-Positioned Enerpac Tool Group May Move Lower 

Enerpac Tool Group (NYSE: EPAC) has been working very hard over the last few years to effect a transformation that appears to be paying off. The company has, despite the pandemic and its many hurdles, been able to grow in the wake of these efforts but there is a problem. Headwinds within the economy have begun to sap strength from the company’s efforts and that may weigh on results moving forward. With this in mind, the high 23X earnings multiple and low 0.20% dividend yield aren’t all that attractive. 

Enerpac Grows Revenue, Shrinks Earnings

Enerpac Tool Group had a decent quarter posting revenue of $149.1 million. The net is up 10% from last year on a continuing operations basis and was driven by strong product sales. Product sales rose by 12% and were offset by a small 1% gain in services but there are numerous offsetting factors to be aware of. The bad news with FX. FX headwinds are worth another 400 basis points in growth and they are not expected to subside. Worse, the revenue missed the consensus by 200 basis points, and the outlook for the year was narrowed. 

Moving down, the earnings news is worse with gross and adjusted margins narrowing sharply from last year. The mitigating factors are that restructuring charges, leadership search charges, and costs related to the ASCEND program are to blame for most of the miss. The bad news is that an agent in the MENAC region caused a $10.8 million dollar build-up in receivable reserves that cut $0.14 off the bottom line. The company says it is still doing business in the region, directly with the customers, but we think it unlikely this money will be recouped any time soon. So, the $0.07 in GAAP EPS is down 83% from last year while the adjusted $0.16 is down 43% and missed the Marketbeat.com consensus by $0.12. 

Turning to the guidance, it’s pretty weak despite the underlying strength in business. The company is expecting full-year revenue in the range of $560 to $570 million which is down $10 million at the high-end and the earnings outlook is no better. For earnings, the company is expecting to see incremental margin improvement but ex-FX which may more than offset the gain. In our view, the guidance is not only weak but there is downside risk as well. 

Enerpac Tool Group Returns Capital To Shareholders 

As iffy as the results and guidance are, Enerpac Tool Group is still generating profits, cash flow, and free cash flow enough to pay a dividend and buy back shares. The dividend is small at 0.20% but the buyback plan is more robust. The company bought back roughly $36 million in shares during the 3rd quarter which is worth another 3% of the market cap. The buyback totaled 1.8 million shares which leave 8.2 million shares under the current authorization or about 12.75% of the shares outstanding. 

The Technical Outlook: Enerpac Sets New Low, New Lows In Sight 

Shares of Enerpac Tool Group fell 10% in the wake of the Q3 results and guidance and may fall further. The move not only confirms resistance at the $20 level but also set a new low that is confirmed by the indicators. Both stochastic and MACD are pointing lower and have room to fall so we think this stock could move down to the $17 level or lower.