Generac Holdings (NYSE: GNRC) is known for producing some of the most powerful backup power systems and generators, and its strategies are just as strong.
Striving to become the leader in all energy and technology solutions, transitioning from solely generators, Generac has adopted a strategy focused on mergers and acquisitions, decreasing costs, and enhancing the scale and scope of its operations.
Such strategy, in conjunction with rising demand for energy solutions at a time where clean and sustainable energy is of concern to many, has led to impressive financial performance and a positive outlook toward the future, boasting an 18% revenue CAGR since 2010.
Generac, founded in 1959, produces power systems, solar and battery storage systems, advanced power grid software platforms, and smart devices such as home thermostats – to name just a few offerings.
The creation of the first automatic home standby generator is attributed to Generac’s efforts, but the business has since transformed into an energy empire, operating in over 150 countries and employing over 700 engineers.
I’m bullish on Generac.
Energetic Financial Performance
Investors may be eager to allow Generac to power their portfolios after a review of its recent financial performance.
Operating and net margins are currently 20.89% and 15.39%, respectively, which are significantly better than the industry as a whole. Similarly, the three-year revenue growth rate is 13.3%, with a three-year EBITDA growth rate of 21.8%.
This growth is enabled by the successful management of capital and strategic investments of Generac, as evident in a return on equity of 34.81% and a return on assets of 15.14%. This trend continues into the economic profit of the firm – or the difference between the return on invested capital and the weighted average cost of capital – currently at 12% and rising over recent years.
In Q3 2021, the company reported net sales increased 34% to $943 million, compared to $701 million in the third quarter of 2020. Consequently, net income was $132 million in Q3, translating into EPS of $1.93, up from $115 million and $1.82 for the same period last year.
This was offset, however, by a decline in cash flow from operations from $155 million in the previous year to $74 million, resulting in a subsequent decrease in free cash flow from $148 million to $42 million. While not ideal, Generac is still dedicated to increasing shareholder value, with $250 million remaining in its share repurchase program.
Looking toward the future, full-year 2021 guidance of net sales growth of approximately 47% to 57% is still in place. On the contrary, due to recent supply chain constraints and rising input costs, the net income margin for 2021 is now expected to be approximately 15% as opposed to the previous expected 15.5% to 16%.
This is followed by a slightly decreased EBITDA margin outlook, now at 23.5% compared to a previous range of 24.5% to 25%. Regardless, these margins are still respectable when considering current inflation circumstances and the cost of recent acquisitions.
President and CEO Aaron Jagdfeld was pleased with these results, stating, “We again hit record production levels in spite of the challenging supply chain environment that deteriorated during the third quarter.”
He continued, “We have tremendous momentum in our business as we head into 2022 with the continuation of robust home standby demand, an expanding Energy Technology solutions portfolio, and strong global demand for our C&I products.”
He is also confident that the aforementioned cost of acquisitions will proliferate this performance, explaining, “… we recently announced several strategic acquisitions that will accelerate our new ‘Powering a Smarter World’ strategy as we continue our evolution into an energy technology solutions company.”
As far as valuation, the current P/E ratio is 33x, which is somewhat higher than the industry, though the RSI suggests that the stock may be nearing the territory of being oversold, currently in the mid-30 area. Nonetheless, Generac’s return over the last year outperforms the return of the S&P 500.
Growth: Mergers and Acquisitions
Generac has announced a multitude of acquisitions since 2016, taking advantage of both vertical integration, in which suppliers are acquired, and horizontal integration, buying out fellow competitors.
With respect to vertical integration, Generac has acquired companies such as Selmec, Neurio, and Chilicon Power, which produce gensets and remote monitoring platforms, metering technology, and microinverters, respectively, all of which enables Generac to adopt into existing products or create new products, leading to economies of scope.
Likewise, competitors such as Motortech, Captiva, and Offgrid Energy, fellow producers of similar products, have been acquired, not only creating economies of scale and reaching new geographical markets, but instilling economic moats, securing an astounding 71% market share in the standby generator market, compared to a mere 15% held by Kohler, 8% by Briggs and Stratton, and 4% by Cummins.
Most recently, Generac closed on the acquisition of ecobee Inc., which has facilitated the creation of its intelligent home energy ecosystem offerings.
Realizing this is not only beneficial for the company, but also for the public, Jagdfeld commented, “Such a system will help homeowners save money on their energy costs and allow grid operators to better balance supply and demand in more cost-effective ways,” illustrating the efforts of the firm to carry out its social function.
On an internal level, Generac also recently announced that it is increasing the capabilities of its South Carolina manufacturing, assembly, and distribution facility. The addition of 200,000 square feet, expected to be completed in the third quarter of 2022, will increase storage capacity and enable increased production.
It is imperative that Generac continues to exploit these improvements, as demand is rapidly increasing.
Strong Tailwinds: Right Place and Time
A great deal of attention is being given to the global energy situation. Companies are now being penalized for carbon emissions and subsidized for reducing them. Climate change is leading to some of the most severe weather observed, from hurricanes to tornadoes. The quality of infrastructure has also fallen behind, with new initiatives to improve it.
While this isn’t good news for the public, Generac is certainly benefitting from it.
Homes, and especially businesses, not only desire generators to mitigate more frequent power outages, but are turning to electricity to power HVAC systems and appliances.
Additionally, spending more time at home, not only resulting from the pandemic but an increased emphasis on work-life balance, has created the need for smart home solutions and solar capabilities. Lastly, with the emergence of EVs, efficient and cost-effective charging stations, both public and private, will be necessities in the future.
Generac is in the perfect position to capitalize on such demand.
Wall Street’s Take
Wall Street seems to agree, placing a Strong Buy rating on GNRC based on 13 Buy ratings and one Hold rating. The average Generac price target of $505.64 implies 59.7% upside potential, with a high price target of $575 and a low of $471.
Conclusion
Consumers and businesses have placed their trust in Generac to sufficiently power their homes and operations under various circumstances, and it may be wise to do the same with respect to its management of capital and ability to create shareholder value.
The precedence Generac has established of manufacturing quality products is certainly translated into impressive performance.
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