Temporary Headwinds Shouldn't Hamper Generac's Long-Term Growth
With the electric power grid stressed out in many parts of this country, it is usually wise to own a home backup generator. Also, the historic Texas winter storm in February 2021 brought home generators to a new level of importance. The leader in this industry is Generac Holdings Inc. (NYSE:GNRC). The company manufactures and sells power generation equipment, energy storage systems and other power products for the residential, light commercial and industrial markets worldwide.
It also sells related accessories such as engines, alternators, batteries, electronic controls, steel enclosures and other components.
Founded in 1959, the company is expected to generate over $5 billion in revenue this year. It currently has a market capitalization of $7 billion.
Product lineup
Generac provides residential automatic standby generators, air-cooled engine residential standby generators and liquid-cooled engine generators, all which have varying degrees of output.
In addition, the company makes various portable generators as well as outdoor power equipment such as trimmers, mowers, log splitters, stump grinders, wood chippers, pressure washers and water pumps.
It also makes products for commercial and industrial use, such as mobile pumps, dust-suppression equipment, gaseous-engine control systems and light-commercial standby generators. Its industrial generators, which range in output from 10 kilowatts to 3,250kW, are used as emergency backup for hospitals, telecommunications and data centers, commercial offices, retailers, municipal facilities and manufacturing centers.
Roughly two-thirds of revenue is residential related and the other third is commercial and industrial. The total addressable market is expected to expand to $72 billion by 2025.
Financial review
In August, Generac reported strong second-quarter financial results with organic revenue growth of 33% and adjusted Ebitda increasing 24%. Gross margins were 35.4% compared to 36.9% in the prior-year period. Gross margins continued to be negatively affected by higher input costs, including increased commodity prices, logistics costs and labor. These costs were somewhat offset by price increases.
However, on Oct. 19, the company disclosed disappointing preliminary third-quarter results. Although Generac recorded double-digit revenue growth, net income was $112 million compared to $151 million in the prior-year period and Ebitda is expected to be $184 million compared to $209 million.
In a statement, Generac President and CEO Aaron Jagdfeld explained the shortfall.
Despite reporting mid-teens net sales growth, third-quarter results fell short of our prior expectations," he said. "While shipments of Commercial & Industrial products performed as expected, Residential product sales were pressured during the quarter. As discussed on our second-quarter earnings call, installation capacity for home standby generators continued to grow but still lagged our production output during the third quarter. This has resulted in higher field inventory levels and lower home standby generator orders from our channel partners than previously expected even as end customer demand continues to be strong, driven by elevated power outages, most notably from Hurricane Ian. Additionally in the quarter, clean energy product shipments were negatively impacted by a large customer which ceased operations and has since filed for bankruptcy protection.
As a result, full-year revenue growth guidance was reduced from the range of 36% to 40% to the range of 22% to 24%. The company did not report preliminary balance sheet data, but as of June 30, Generac had total cash and equivalents of $467 million and total long-term debt of $1.3 billion.
Valuation
Before the revised guidance was issued, analyst consensus earnings per share estimates were $12.06 for 2022 and $13.36 for 2023. Based on the most recent closing price, that puts the stock trading in the single-digit price-earnings range. However, those estimates will certainly come down after revised guidance is taken into consideration. I expect earnings estimates for 2022 to come down to approximately $10.70 and $12 for 2023. That still makes Generac a cheap stock.
The GuruFocus discounted cash flow calculator creates a value of $171 using earnings of $10.70 and a 10% long-term growth rate.
The company currently does not pay a dividend, but uses a large portion of free cash flow to acquire companies. Earlier this month, for instance, Generac announced it acquired industrial internet of things platform Blue Pillar for an undisclosed amount.
Guru trades
Gurus who have purchased Generac stock recently include Paul Tudor Jones (Trades, Portfolio), Mairs and Power (Trades, Portfolio), First Eagle Investment (Trades, Portfolio), John Rogers (Trades, Portfolio) and Joel Greenblatt (Trades, Portfolio). In contrast, Robert Olstein (Trades, Portfolio) recently reduced his position.
Conclusion
Generac still has a leading market share position and is poised for strong long-term growth, particularly when considering its clean energy strategy. In addition, the company will benefit from extreme weather events, growth in renewable energy and the consumer trend where backup generators will become a must-have home appliance. In addition, the trends involving decarbonization, digitization and decentralization of the electric grid and migration toward distributed energy resources will create even more opportunities.
The company appears to be trading at attractive valuation levels currently, particularly when considering the long-term growth opportunities and increase in total addressable market.
This article first appeared on GuruFocus.
