In theory, record heat waves, western wildfires, rolling blackouts and hurricanes should be good news for the generator manufacturer
But its shares have been falling sharply this year, creating an opportunity for investors to pick up a growth stock at a value share price.
(ticker: GNRC) is the dominant name in residential standby power generation with about three-quarters of the U.S. market. These sales make up about half of the company’s revenue, while the rest comes from commercial and industrial customers, as well as from the maintenance of these generators.
It’s not that strange
is known as a storm stock. When superstorm Sandy hammered the Northeast in 2012, Generac’s sales shot up to $1.5 billion in 2013, nearly double what they were two years earlier. From there, Generac just kept going. “Any event that involves power outages, including storms, blackouts, utility failures, whatever, drives increased awareness and therefore increased sales,” says Baird analyst Mike Halloran.
In some places, company backup generators are considered necessities. Jonathan Skyrme of Trumbull, Conn., has a 10-kilowatt generator system that runs on propane, large enough to run most of his house in the event of an outage. It is not uncommon in the rural neighborhood of Skyrme, where branches from old Norway maples seem to fall 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 big weather event.”
There’s more than just bad weather leading to power outages these days. Wildfires in California can leave people without power for days, while grid problems have knocked out power in Texas at times when it’s most needed.
Things get worse. The average American electric customer lost power for more than eight hours in 2020, according to the latest available data. That’s an increase of 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 just one percentage point means an additional $2.5 billion in addressable market for Generac. That helps explain why the company has been able to increase sales by 340% and earnings by 664% from 2012 to 2022, including estimates. Now, California looks like an untapped market that could spark fresh growth for Generac.
“California has not historically been a home market for standby generators,” said Credit Suisse analyst Maheep Mandloi. Less than 2.5% of homes have standby power. States in the Northeast, for example, have penetration rates between 10% and 20%.
Yet Wall Street treats Generac like a broken stock. Its shares have fallen 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 isn’t going to grow much next year. While sales are expected to hit $5.2 billion in 2022, up 39% from 2021, Wall Street expects growth of just 9.4% for 2023. Slow growth causes growth investors to dump a stock, and it takes time, before value investors feel comfortable jumping in .
Generac shares may be close to that point. Consider that in mid-2021, Generac stock traded at 40 times next year’s estimated earnings, double the S&P 500’s already expensive multiple of 20. Shares now trade for just 13 times estimated 2023 earnings, a discount to that wider market. The stock may have been overpriced in 2021, but it looks too cheap now.
It’s not as if the company’s growth is disappearing. Wall Street expects sales and earnings to grow 10% and 16% on average in 2023 and 2024, respectively. That’s much faster than the market, which is expected to grow earnings at a 7% clip. It also follows a historical pattern for Generac. After Superstorm Sandy, sales fell flat between 2013 and 2016, but sales in 2022 are expected to more than triple 2013 levels.
Greener electricity generation has raised some concerns about obsolescence; if everyone has solar panels on their roof, no one needs a generator. But solar panels and battery storage still cost several times what a Generac system costs, says Credit Suisse’s Mandloi. And the batteries can run out if a power outage lasts too long.
Generac also invests in clean tech. It has acquired companies involved in energy storage, solar inverters — the electrical equipment that converts the sun’s direct current into alternating current for homes — along with other products that give retailers more to sell when pitching backup power products to potential customers.
“The clean energy business is still in growth/development mode,” says Baird’s Halloran. “We believe it is a long-term value creator for the company.”
Generac does not need to return to its former highs 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 $275 per share, below the average analyst target of $340. But even at Halloran’s lower level, Generac stock would gain more than 50% — and trades at just 20 times 2023 earnings, a big discount to its three-year average of nearly 26 times.
At these levels, Generac looks like a great way to strengthen any portfolio.
Write to Al Root at email@example.com