GNRC - Generac: 5 Key Takeaways From Analyst Day

2023-09-30 07:07:00 ET

Summary

• Generac's conference affirmed higher long-term targets, boosting shares by 5% and reassuring investors.
• The company expects to double EBITDA by 2026 through improving product mix and operating leverage.
• There is significant growth potential in the residential segment, with a focus on increasing market penetration and targeting new home buyers.
• The Energy Technology segment targets breakeven profitability by 2026 after a reset in 2023.
• The Commercial and Industrial (C&I) segment's global growth potential is underscored by new US facility and international demand due to grid challenges.

Generac ( GNRC ) held its analyst day conference on September 27th, and shares rose 5% on the affirmation of 2023 guidance and long-term targets that were higher than initially estimated and appear reasonable as inventories normalize and supply chains recover.

Management remains confident in long-term secular megatrends accelerating the value homeowners place on energy security. GNRC continues growing its portfolio of backup power and home energy control products.

Generac presents a compelling investment proposition against the backdrop of a global shift towards energy resilience and self-sufficiency. The escalating adoption of solar plus storage solutions and the heightened interest in backup power, especially amidst a spate of weather-induced disruptions and grid instabilities, align well with the company's strategic direction. Generac's robust distribution network and strong brand recognition further solidify its potential for sustained growth and value addition in the coming years.

1. 2023 Guidance Reiterated

During the conference, management reiterated its FY 2023 guidance and expects revenue of $4.02B to $4.11B and adjusted EBITDA margins of 15.5% to 16.5%, translating to an EBITDA of $623M to $678M. The Commercial & Industrial (C&I) segment is expected to grow in the mid-teens, while the residential segment is expected to decline in the mid-twenties.

This past year has posed significant challenges for GNRC as the imbalance between supply and demand drew investors' apprehension. The concerns largely stemmed from supply-side bottlenecks exacerbated by climate-induced severe weather, inadequate infrastructure investments, and regulatory penalties for carbon emissions. Meanwhile, the demand for Generac's solutions remains fueled by broader electrification trends, next-generation infrastructure initiatives, and the growing concept of home as a sanctuary.

Management reasserting 2023 guidance is a subtle positive, alleviating investor fears over potential guidance downgrades. Amidst a backdrop of supply-side obstacles, this reiteration underscores Generac's strategic positioning to leverage the ongoing demand drivers, shedding a promising light on its ability to navigate the current market adversities. As Generac continues to adapt to the evolving market dynamics, its investment narrative encompasses a blend of challenges and opportunities lying ahead.

2. Path to Doubling EBITDA by 2026

GNRC expects to grow total revenues by 12% to 14% annually through 2026 and targets margins returning to its long-term average of 37.5% to 38.5% gross margin and 21.5% to 22.5% EBITDA margins in 2026, relative to 34% to 34.5% and 15.5% to 16.5% in 2023 guidance. The implied FY26 EBITDA doubling over FY23 guidance is predominately attributed to improving product mix, operating leverage, positive price dynamics, and less dilution from the energy technology segment.

While GNRC looks for growth to tilt towards 2025-2026, expectations of a weaker consumer in 2024 are offset through $300mm of channel under-shipment during 2023, which should benefit residential growth regardless of end-demand next year.

However, amidst the positive outlook across various segments, a pivotal assumption underpinning the 2026 targets is the increase in the energy technology mix to 21% from 12% in FY23. This ambitious stride may cause investor skepticism once more clarity is achieved regarding the recent execution challenges within that business segment.

3. Residential Segment Growth Opportunity

The current market penetration of 6% in residential Home Standby (HSB) underscores a significant growth opportunity. GNRC estimates the penetration will reach 7.8% by 2026, with each additional percentage point of penetration equating to a $3bn end-market revenue opportunity. This represents a unique opportunity to drive growth in a category with secular tailwinds by harnessing the power of full-funnel marketing and distribution development.

In-home consultations are up four times from 2019 levels, close rates have rebounded off 1Q22 lows, and awareness data pointing to record Generac brand recognition underpins management's confidence in medium-term double-digit HSB growth.

A notable demographic insight is that 65% of Generac's existing customer base comprises individuals over 60. This demographic implies a significant underrepresentation among new home buyers in millennials. It also indicates a potential growth tailwind as a new, energy-conscious generation transitions into homeownership.

4. Energy Technology - Breakeven Profitability by 2026

GNRC's energy technology segment has yet to meet external and internal expectations. The segment has refocused on a quality first product portfolio rebuild. Over the past year, management has focused on building a capable team, adding engineers, and increasing product testing standards to avoid product underperformance before being sold.

While 2024 targets include executing 2023's groundwork, a return to strong growth and profitability is not expected until 2025 and 2026. Investor sentiment toward this business must be tampered and understand that 2023 is a reset year, with a meaningful step-up in 2024.

The long-term outlook for this segment remains encouraging, with Generac aiming for a revenue of $700 million next year and breakeven profitability by 2026. The enhanced product slate encompasses residential offerings like an EV charger, solar inverter, and a next-gen storage system/home energy controller. Meanwhile, the C&I segment focuses on stationary and mobile storage beyond standby generators, connectivity, and grid services.

5. C&I Global Growth Potential

The C&I segment continues to experience secular tailwinds, prompting GNRC to build a 4th US facility in Beaver Dam, WI, with completion expected in early 2025. Within the US, C&I customers seek more complex, full-service solutions to support grid-services opportunities, pushing demand for GNRC's beyond standby offerings.

Telecommunications providers and data center operators emerge as pivotal customers underpinning growth plans, given their extensive capacity buildouts through the end of the decade and high energy reliability standards.

The international outlook within the C&I segment remains strong as accelerating Electric Vehicle (EV) penetration and a growing renewables mix forcing grid intermittency challenges and grid services incentives all buoy demand expectations. Notably, the C&I segment constituted nearly 75% of GNRC's international product mix in 2022, attesting to its global significance.

Conclusion

GNRC is currently trading at the lower end of its 52-week range, offering a potentially attractive valuation relative to its 2024-2025 earnings. The upbeat sentiment following investor day adds an appeal of a return to normalcy. However, a hold is recommended until tangible improvements in operational and financial efficiencies manifest, affirming the ambitious goal of doubling EBITDA by 2026 is more than just a lofty projection. The trajectory of the Residential, C&I, and Energy Technology segments, both in the US and internationally, will be instrumental in translating Generac's strategic blueprints into tangible financial milestones, warranting close investor scrutiny.

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