In theory, record heat waves, Western wildfires, rolling blackouts, and hurricanes should be good news for generator maker
But its shares have been falling sharply this year, and that creates an opportunity for investors to pick up a growth stock at a value-stock price.
(ticker: GNRC) is the dominant name in residential standby power generation, with about three-quarters of the U.S. market. Those sales make up about half the company’s revenue, with the remainder coming from commercial and industrial customers, as well as from maintaining those generators.
Little wonder that Generac 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 it was two years previously. From there, Generac just 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 necessities. Jonathan Skyrme of Trumbull, Conn., has a 10-kilowatt generator system that runs on propane, big enough to run most of his house in the event of an outage. Those aren’t uncommon in Skyrme’s rural neighborhood, where branches from old Norway maples seem to 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 than just bad weather driving power outages these days. Wildfires in California can leave people without power for days, while problems with the grid have knocked out the electricity in Texas at times when it is most needed.
Things are getting worse. The average U.S. electricity customer lost power for more than eight hours in 2020, according to the most recent data available. That’s up more than 100% from 2013, the first year the Energy Information Administration started collecting data.
Just 6% of U.S. households own generators, and expanding that by just one percentage point means another $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 through 2022, including estimates. Now, California looks like an untapped market that could fuel fresh growth for Generac.
“California hasn’t been historically a home standby-generator market,” says Credit Suisse analyst Maheep Mandloi. Less than 2.5% of homes there have standby power. States in the Northeast, for instance, have penetration rates between 10% and 20%.
Yet, Wall Street is treating Generac like a broken stock. Its shares have dropped 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 an increase of just 9.4% for 2023. Slowing growth causes growth investors to dump a stock, and it takes time before value investors feel comfortable jumping in.
Generac stock might be getting close to that point. Consider that in mid-2021, Generac stock was trading at 40 times the 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 the broader market. The stock might have been too expensive in 2021, but it looks too cheap now.
It isn’t as if the company’s growth is disappearing. Wall Street expects sales and earnings to grow by an average of 10% and 16%, respectively, in 2023 and 2024. That’s much faster than the market, which is expected to grow earnings at a 7% clip. That also follows a historical pattern for Generac. After superstorm Sandy, sales flatlined between 2013 and 2016, but 2022 sales are expected to be up more than threefold from 2013 levels.
The greening of power 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 multiples of what a Generac system costs, says Credit Suisse’s Mandloi. And batteries can run out if an outage lasts too long.
Generac is investing in clean tech, too. It has acquired companies involved in energy storage, solar inverters—the electric equipment which converts the sun’s direct current into alternating current for homes—along with other products that give dealers more to sell when they are 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 doesn’t have to get back to its former 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 $275 a share, below the average analyst target of $340. But even at Halloran’s lower level, Generac stock would gain more than 50%—and be trading at just 20 times 2023 earnings, a big discount to its three-year average of almost 26 times.
At these levels, Generac looks like a great way to power up any portfolio.
Write to Al Root at [email protected]