In theory, record heat waves, western wildfires, rolling blackouts and hurricanes should be good news for generator maker
But stocks have fallen sharply this year, giving investors an opportunity to buy a growth stock at a value stock price.
Waukesha, Wisconsin-based Generac (ticker: GNRC) is the dominant name in residential standby generation, accounting for 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 servicing those generators.
No wonder Generac is known as a storm supply. When Superstorm Sandy ravaged the Northeast in 2012, Generac’s revenue skyrocketed to $1.5 billion in 2013, nearly double the figure two years earlier. From there Generac just kept going. “Any event that involves power outages, including storms, blackouts, blackouts, whatever, creates more awareness and therefore more sales,” said Baird analyst Mike Halloran.
In some places, the company’s backup generators are considered necessary. Jonathan Skyrme of Trumbull, Connecticut, has a 10-kilowatt generator system that runs on propane, big enough to run most of his house in the event of a power outage. That’s not uncommon in the rural neighborhood of Skyrme, where branches of old Norway maples seem to come down every time the wind blows. “I like the idea of my system,” he says. “It’s reassuring to know it’s there for the next big weather event.”
Today there is more than just power outages due to bad weather. California wildfires can leave people without power for days, while grid problems have cut off Texas electricity when it’s most needed.
Things are getting worse. According to the most recent data available, the average US electricity customer was out of power for more than eight hours in 2020. That is more than 100% compared to 2013, the first year that the Energy Information Service started collecting data.
Only 6% of US households own generators, and expanding that by just one percentage point adds another $2.5 billion in addressable market to Generac. That explains why the company managed to increase sales by 340% and profits by 664% between 2012 and 2022, including estimates. Now California appears to be an untapped market that could spur new growth for Generac.
“California has not traditionally been a market for home standby generators,” said Credit Suisse analyst Maheep Mandloi. Less than 2.5% of the homes there have standby power. For example, states in the Northeast have penetration rates between 10% and 20%.
Still, Wall Street treats Generac as a broken stock. The stock is down 50% to $175.83 in 2022, making it the 16th worst-performing stock in the
Part of the problem is that Generac is a growth stock that won’t grow much next year. While revenue is expected to reach $5.2 billion in 2022, up 39% from 2021, Wall Street expects a rise of just 9.4% for 2023. Slowing growth will see growth investors dump some stock , and it takes some time for value investors to feel comfortable jumping in.
Generac stocks may be getting close to that point. Recall that in mid-2021, Generac’s 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 its estimated 2023 earnings, a discount. in the wider market. The stock may have been too expensive in 2021, but it looks too cheap now.
It is not that the growth of the company is disappearing. Wall Street expects revenue and profit to grow by an average of 10% and 16% in 2023 and 2024, respectively. That’s much faster than the market, which is expected to grow earnings by 7%. That too follows a historical pattern for Generac. After super storm Sandy, sales have remained the same between 2013 and 2016, but in 2022 sales are expected to more than triple compared to 2013.
The greening of 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 multiples of what a Generac system costs, says Credit Suisse’s Mandloi. And batteries can run out if a failure lasts too long.
Generac also invests in clean technology. It has acquired companies 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 dealers more to sell when they offer backup power products to potential customers. .
The “clean energy business is still in growth/development mode,” Baird’s Halloran said. “We believe it is a long-term value creator for the company.”
Generac doesn’t have to go back to its old heights to be a good investment. Mandloi has a $395 price target for the stock, one of 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’s stock would rise more than 50% — and trade at just 20 times earnings for 2023, a big discount from the three-year average of nearly 26 times.
At these levels, Generac seems like a great way to bolster any portfolio.
Write to Al Root at email@example.com