In theory, record heat waves, Western wildfires, rolling blackouts, and hurricanes should be good news for the generator maker
But its shares have been falling sharply this year, creating an opportunity for investors to pick up a growth stock at a stock-value price.
(ticker: GNRC) is the dominant name in residential standby power generation, with about three-quarters of the US market. Those sales represent about half of the company’s revenue, with the rest coming from commercial and industrial customers, as well as the maintenance of those generators.
Little wonder Generac is known as a storm stock. When superstorm Sandy hit the Northeast in 2012, Generac’s sales soared to $1.5 billion in 2013, nearly double what it was two years earlier. From there, Generac kept going. “Any event involving outages, including storms, blackouts, utility failure, whatever drives increased awareness and therefore increased sales,” says Baird analyst Mike Halloran.
In some places, the company’s backup generators are considered necessary. Jonathan Skyrme of Trumbull, Conn., has a 10-kilowatt generator system that runs on propane, which is big enough to run most of his house in the event of an outage. Those are not uncommon in the rural neighborhood of Skyrme, where the branches look like old Norwegian maps that come down every time the wind blows. “I love the idea of my system,” he says. “It’s reassuring to know it’s there for the next major weather event.”
There’s more to driving power outages these days than bad weather. Wildfires in California can leave people without power for days, and grid problems have knocked out electricity in Texas at times when it’s needed most.
Things are getting worse. The average US electricity customer lost power for more than eight hours in 2020, according to the latest data available. That’s up more than 100% from 2013, the first year the Energy Information Administration began collecting data.
Only 6% of US households own generators, and expanding that by one percentage point means another $2.5 billion in addressable market for Generac. That helps explain why the company managed to increase sales by 340% and earnings by 664% from 2012 to 2022, including estimates. Now, the California market looks untapped which could spur new growth for Generac.
“California has not historically been a standby home generator market,” says Credit Suisse analyst Maheep Mandloi. Less than 2.5% of homes there have standby power. States in the North East, for example, have penetration rates between 10% and 20%.
But, Wall Street is treating Generac as a broken stock. Its shares fell 50%, to $175.83, in 2022, making it the 16th worst performing stock in the S&P 500 this year.
Part of the problem is that Generac is a growth stock that won’t see much growth next year. While sales are expected to reach $5.2 billion in 2022, a 39% increase from 2021, Wall Street expects a mere 9.4% increase for 2023. The sluggish growth is causing growth investors to dump the stock, and it takes time before investors feel comfortable jumping in. .
Generac stock may be approaching that point. Consider that in mid-2021, Generac stock was trading at 40 times next year’s estimated earnings, double the already expensive S&P 500 multiple of 20. Shares now trade at just 13 times estimated 2023 earnings, a discount to the broader market. The stock may have been overpriced in 2021, but it looks too cheap now.
It’s not like the company’s growth is going away. Wall Street expects sales and earnings to grow an average of 10% and 16%, respectively, in 2023 and 2024. That’s much faster than the market, which expects earnings to grow at a 7% clip. That follows a historical pattern for Generac as well. After superstorm Sandy, sales increased between 2013 and 2016, but 2022 sales are expected to more than triple 2013 levels.
There are some concerns about obsolescence due to the greening of power generation; if everyone has solar panels on their roof, no one needs a generator. But solar panels and battery storage cost multiples of what a Generac system costs, says Credit Suisse’s Mandloi. And batteries can die if a break lasts too long.
Generac is also investing in clean technology. It has acquired companies involved in energy storage, solar inverters – the electrical equipment that converts the direct current of the sun into alternating current for homes – along with other products that give dealers more to sell when adding backup power products to potential customers.
“The clean energy business is still in growth/development mode,” says Halloran Baird. “We believe he is a long-term value creator for the company.”
Generac does not need to return to its previous heights to be a good investment. Mandloi has a $395 price target on the stock, among the highest on the Street. Halloran’s target is a more modest share of $275, below the average analyst target of $340. But even at Halloran’s lower level, Generac stock would gain more than 50% — and it would be trading at just 20 times 2023 earnings, a steep discount to its three-year average of nearly 26 times.
At these levels, Generac is a great way to power any portfolio.
Write to Al Root at email@example.com