Generac Holdings (ticker: GNRC) has had a remarkable history of consistent growth, with its earnings and revenue compounding over time - even amidst the challenges posed by the Covid-19 pandemic. However, the recent decline in net income by 37% and revenue by 11% in 2023 has left investors wondering if the company will regain its former glory.
This downturn in performance has also impacted the company's stock, which has witnessed a significant drop of 56% over the past year and 35% since 's previous recommendation to buy on Sept. 22.
Initially, the appeal of Generac was driven by the increasing demand for backup power generators from both homeowners and businesses. With a market value of $6.8 billion, Generac dominates about three-quarters of the U.S. market for standby generators - an essential tool for powering households during blackouts or other electricity disruptions.
Furthermore, the rise in natural disasters and the growing demand from electric vehicles have placed additional strain on power grids. According to recent government data, the average American electricity customer experienced over seven hours of power loss in 2021, compared to four hours five years prior. Generac's products act as a crucial safeguard, ensuring that lights stay on even during challenging times.
Surprisingly, some of the most promising markets for Generac's generators have relatively low installation rates. For instance, in California, fewer than 2.5% of homes have standby power, while several Northeastern states boast penetration rates between 10% and 20%. This indicates tremendous potential for growth in these untapped markets.
Given this potential for expansion, Generac had previously traded at a forward price/earnings multiple in the mid-20s, reflecting a premium compared to other mid-cap industrial stocks. However, due to an inventory glut resulting from management errors, the company's valuation has now declined to just 16 times the earnings. This unfortunate misstep continues to impact sales and earnings.
Despite these challenges, Generac Holdings presents an intriguing investment opportunity. With its strong market position and the potential for growth in various markets, the company is poised to bounce back and deliver value to shareholders. As a growth stock available at a discounted price, Generac Holdings certainly deserves consideration from savvy investors looking for long-term opportunities.
Generac Faces Challenges as Inventory Levels Remain Higher
At the end of the second quarter, Generac's inventory levels were still significantly higher than normal, although there was a modest improvement from the previous quarter. However, it fell short of management's expectations, leading the company to anticipate that it will not return to normal inventory balances until the end of 2023. This development caused Generac's full-year revenue and earnings to be adjusted downwards, resulting in a 24% drop in its shares on August 2nd.
Short-Term Dip in Stock Presents Opportunity for Investors
While the delay in inventory normalization had a negative impact on Generac's stock, the long-term outlook for the company remains promising. As a result, Truist Securities analyst, Jordan Levy, upgraded Generac stock to a Buy rating after the significant drop. Levy kept his price target for the stock at $160, representing a potential increase of 45% from its recent price of $110.
In Levy's opinion, this presents an attractive opportunity for investors to invest in a well-established name in the home and commercial backup power industry. He also believes that there is upside potential from Generac's recovering Clean Energy segment.
Investor Day Presents Positive Catalyst
Generac management has plans to host an investor day in late September. This event could potentially serve as a positive catalyst for the company's shares. It is likely that the focus of the event will be on Generac's promising clean-energy segment. However, this is not the only reason to consider investing in Generac.
Seasonal Opportunities and Volatility
Generac has historically experienced positive movements in its stock during October, which is the peak month of the Atlantic hurricane season. Since going public in 2010, the stock has risen in 10 out of 13 Octobers, with a median gain of 12%. Additionally, shares tend to jump by 10% on the morning after a major storm makes landfall in Florida or Texas.
Conclusion: Generac's Growth Story Persists
Although Generac is currently facing challenges with its inventory levels, it continues to be a solid choice for investors interested in the home and commercial backup power industry. The company's long-term growth story remains intact, and the recent dip in its stock price provides an opportune entry point for investors. Despite the short-term volatility, Generac's established position in the market and potential for growth make it an appealing option.