ESCO Technologies Stock Is Likely To Rebound To Levels Above $80

We believe that ESCO Technologies stock (NYSE:ESE), an engineered products and solutions provider for application in navy, aviation, and industrial markets, is a good buying opportunity at the present time. ESE stock trades near $78 currently and it is, in fact, down 25% from its pre-Covid high of $104 in February 2020 – just before the coronavirus pandemic hit the world.

ESE stock traded above $100 levels for the better part of the first half of this year, before it saw a gradual decline from levels of $110 in early May to under $80 currently. The pessimism around its stock can partly be attributed to its fiscal Q3 results (announced last month), that were well below the street estimates. The company also announced a couple of acquisitions over the recent months. It acquired Phenix Technologies, a manufacturer of portable and stationary power test systems, with annual revenues of $25 million, and Altnova – which makes monitoring systems and diagnostic products – with annual revenues of $30 million. Both the acquisitions will bolster ESCO revenue growth going forward.

Returning to pre-Covid levels means that ESE stock will have to rise 32% from here. However, we believe that will likely take a longer time to materialize and estimate ESCO Technologies’ valuation to be around $81 per share currently. The reason behind this is that Covid-19 has led to a decline in demand for its aviation business, and there is still uncertainty around the overall recovery in aviation demand. That said, given the company’s recent acquisitions, the overall revenue growth is likely to pick up pace going forward, and aid the stock price appreciation. We believe the gains will be much higher in the medium to long-run. Our conclusion is based on the detailed comparison of ESCO Technologies stock during the 2008 recession vs now in our interactive dashboard analysis.

Timeline of 2020 Coronavirus Crisis:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, 2020, as Covid-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• Since 3/24/2020: S&P 500 rallies 99% from the lows seen on Mar 23, 2020, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here is how ESE stock and the broader market fared during the 2007-08 crisis

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)

ESE and S&P 500 Performance Over 2007-08 Financial Crisis

ESE stock moved up from levels of about $35 in September 2007 (pre-crisis peak for the markets) to levels of $48 in September 2008, and from there it dropped to $33 in March 2009 (as the markets bottomed out), implying ESE stock lost just 33% from its pre-crisis highs. It gained 10% post the 2008 crisis to levels of $36 by January 2010. In comparison, the S&P 500 Index saw a decline of 51% from its peak in September 2007 to its bottom in March 2009, followed by a sharp recovery of 48% by January 2010.

What About ESE Fundamentals Over Recent Years 

ESCO’s revenues stood at $719 million over the last twelve-month period, compared to $684 million in fiscal 2018 (fiscal ends in September). Actually, the revenues saw slight growth till 2020, but they have declined over the last year or so, owing to the impact of the pandemic on the company’s business. Looking forward, revenues are estimated to be $801 million in fiscal 2022, reflecting a 12% y-o-y growth. Looking at the bottom line, the company’s EPS plunged to $0.91 over the last twelve-month period, compared to $3.56 in 2018. On an adjusted basis, the company’s EPS is estimated to be $2.53 in 2021 and $3.33 in 2022 (consensus estimate), compared to $2.76 in 2020.

Does ESE Have Sufficient Cash Cushion To Meet Its Obligations?

ESCO’s debt has decreased to $28 million currently, compared to $200 million in 2018, while its total cash has increased to $78 million currently, compared to $30 million in 2018. ESCO used $35 million cash for investments over the last twelve-month period, while it garnered $119 million cash from its operations over the same period. Overall, the company has a solid liquidity cushion to weather the current crisis.

Conclusion

Phases of Covid-19 Crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-September 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• October 2020-February 2021:  Unprecedented surge in Covid cases forcing a fresh round of lockdowns across the nation
• Since March 2021: Ongoing vaccination drive and gradual re-openings drive an improvement in demand – buoying market sentiment

Given the steady decline in the number of new Covid-19 cases in the U.S., we expect an improvement in demand to buoy market expectations. As investors focus their attention on expected 2021 results, we believe ESCO Technologies stock has the potential for strong gains once fears surrounding the Covid outbreak are put to rest.