Generac Soars On Strong EPS As Aging Grid Generates Sales

February 13, 2014

Generac (GNRC) shares soared 13.5% Thursday on blowout Q4 earnings just as another harsh storm left large swaths of the country without power, highlighting the vulnerability of the electrical grid.

The latest storm cut off electricity to a half-million customers in the South alone.

Generac CEO Aaron Jagdfeld told analysts in a conference call that people are finding the aging U.S. power grid unreliable and are buying generators as a precaution.

He also sees an opportunity among custom homebuilders looking to differentiate their offerings with generators and said the company has a sales team in place for that market.

"Having a backup generator in home just makes far too much sense and it's a really important thing for a lot of people going forward," Jagdfeld said.

The Next Appliance?

Generators are becoming less of a "panic purchase" and are increasingly being seen as a creature comfort similar to other household appliances, said Canaccord Genuity analyst John Quealy.

He noted that residential standby generators have far lower penetration rates than do air conditioners and garbage disposals, representing growth potential.

"We're so much more connected with electricity and how we need that reliability of power," he told IBD.

Generac's Q4 earnings per share jumped 28% to $1.11, beating views of 90 cents, as an improved product mix and lower costs sent gross margin soaring 180 basis points vs. the prior year to 38.7%.

Revenue grew 10% to $376.2 million, beating estimates of $361.1 million. The gain came despite unusually high sales in the same quarter a year earlier, when Superstorm Sandy hit.

Growth in Q4 was driven by strong shipments of home standby generators and commercial products, boosted by recent acquisitions.

But a decline in portable generator sales vs. Sandy-driven demand a year earlier, sent residential sales down 8% to $199.1 million. Commercial and industrial sales jumped 43% to $157.9 million, helped by sales of newer natural-gas generators.

Q1 results should have even tougher year-ago comparisons, because generator sales surged in early 2013 due to long lead times on orders placed after Sandy. But this winter's severe weather could drive demand further. Generac sees 2014 sales rising in the mid-single-digit percentage range, better than analysts' view for a 3.4% rise.