Generac: Generators Boom Beyond Storms

2014: A Look Back And Ahead When millions of homes and businesses lose power, as they did when Hurricane Irene hit in 2011 and Superstorm Sandy in 2012, Generac Holdings enjoys a surge in sales for its backup generators.

The afterglow can last up to a year. Revenue nearly doubled from 2010 to 2012 and likely climbed 25% last year.

Generac (GNRC) shares have shot up 150% since Sandy.

But without big storms in 2013, the leading maker of standby generators could see slower growth this year, some analysts say.

Generac CEO Aaron Jagdfeld doesn't see it that way. Power outages, after all, are not all storm-related. Generator demand is booming in emerging markets where demand for power far outstrips the supply.

Jagdfeld talked with IBD just before the end of 2013 about power grids, climate change, the housing market and opportunities here and globally.

IBD: There were no major Atlantic hurricanes in 2013. Is that a concern for sales in 2014

Jagdfeld: There are still a quarter million people every day in this country with an outage.

While we might not have gotten the big, high-publicity events like a Katrina or Sandy, just this week end 400,000 people in Michigan were without power because of an ice storm. These events still create a lot of awareness.

On our product residential side, where penetration rates are only 3% of U.S. households, it doesn't take a lot of things to create improvement in our demand curve.

IBD: Your sales are skewed to the eastern half of the country, where power grids are older and less reliable than in the West. Will they be upgraded anytime soon

Jagdfeld: There are no major plans that we are aware of beyond utility companies' normal cycle of investment. The investment gap, the amount needed to keep the system reliable, continues to grow. It's been a problem for the last 20 years.

Even if a plan were (approved) today to close that gap, it would take years. We don't see anybody starting that. We don't see funding for that. We don't think it will be dealt with in the near term or in the longer term.

IBD: Will grids in the West eventually wear out to the point they'll need backup generators on the magnitude of the East

Jagdfeld: In San Diego you have the perfect storm for very good power quality. They have a newer grid, most of it is underground and they don't get the severity of weather.

But in the Northwest the systems are a little older, a lot of it is still above ground and they do get severe weather. If in the West they underinvest at the rate we're seeing in the eastern U.S., over time there would be reduced reliability.

IBD: Since you are impacted by storm activity and you are expanding globally, what are your thoughts on climate change

Jagdfeld: The climate is changing. We don't know why, we're not climate scientists. I don't think people would dispute that the frequency of some of these major events is increasing. Hurricanes of the type that would happen every 100 years are now happening every five to seven years.

Our commercial and industrial business is much less sensitive to climate-related outages. Developing countries have issues around the reliability of electricity; demand is simply outstripping supply. So that creates an imbalance as opposed to weather creating the imbalance. We've seen it in India, in China.

We are looking to become a bigger player in India. There are more generators attached to buildings in India than anywhere I've ever seen.

IBD: What other regions offer good opportunities

Jagdfeld: Latin America is squarely on our radar screen. Latin American economies are poised for growth in the next decade. For a lot of companies there's a shift from manufacturing in China back to Mexico. And that's creating demand for electricity. And that demand in a lot of cases is coming close to outstripping supply.

We bought a company in Italy that gave us a toehold in Europe. It makes temporary lighting (towers) for construction and oil and gas markets in places like Russia, Africa and the Middle East. They're basically generators with light masts on top.

IBD: How does the economy impact your sales and what are your thoughts for 2014

Jagdfeld: What we watch the most is the construction industry, whether residential or non-residential. About 15% of our residential sales go into new construction. Builders are offering homeowners generators as an option, especially in regions of the country where power quality is poor. We look for 2014 to be a stronger year than 2013 but we have a long way to go to hit the peak of 2006 and 2007.

In non-residential, there are a lot of new offices, health care facilities, data centers, telecom towers and municipal wastewater treatment plants that need backup power.

IBD: Where are you seeing the biggest nonresidential activity uptick

Jagdfeld: Telecom is a big one. As they build out wireless towers and as more critical communications for voice and data go across these towers, it becomes really important that they don't suffer from power outages. We've also been expanding in health care and data centers.

I don't know if it's the Affordable Care Act or the aging of the population, but there is a higher demand for health care services, which is driving construction, whether adding specialized care wings or building assisted living facilities.

Retail construction is pretty muted. It usually lags (new-home construction) by a year or so. We hope by 2015 to see a stronger recovery.

IBD: Do you expect consumer confidence to keep improving in 2014

Jagdfeld: We do. And we generally mean confidence in their home. Home values have improved over the last two years. That gives people confidence to invest in their home, to remodel a kitchen or bathroom or do a project like a generator.

With rates being as low as they've been, people have been refinancing their homes and taking money out to spend on home improvement projects and appliances. Higher rates have taken the edge off a little bit.

IBD: Are there any regulations that are impacting your industry, or might in the near future

Jagdfeld: We have seen increased interest by the Federal Communications Commission since Sandy and Irene in requiring backup power on wireless towers. There is so much critical information for voice and data going across cell phones. And you can't even complete a 911 emergency call if the power is out. I don't know if it'll come to a point of regulation, but the FCC is requesting public commentary.

There are 300,000 wireless towers across the U.S. and only about 30% have backup power. So obviously if the FCC mandated that, there would be 70% that would need backup power.