2023-04-18 11:44:12 ET
Summary
- The COVID-related spike in Generac's stock price has now been flushed out, with the price now at end of 2019 levels, arguably making it an attractive investment opportunity once more.
- On the other hand, company guidance for 2023 suggests that its sales have peaked last year, ending a decade of phenomenal growth for this company.
- There may be some factors, which could reignite revenue growth for Generac's current product line-up, as well as for future products, including growing worries about grid reliability.
- Electricity prices may rise to very high levels going forward as green policies could potentially saddle utilities with massive extra infrastructure costs, making generator-produced power more competitive.
Investment thesis: Generac ( GNRC ) has seen a roughly 80% decline in its stock price since it reached its COVID crisis-induced all-time high reached in Nov 2021. The decline brings its stock price down to levels seen at the end of 2019, before the COVID crisis. The decline in the stock price may be seen as an opportunity to buy. While Generac stock is now a much-improved buying opportunity, certain aspects that arose since the end of 2019 make it still a hold for me. There is much that can still work in favor of Generac's future prospects, ranging from market trends to the potential for new products that can improve its sales. Having said that, it is trading at end of 2019 stock price levels, even though its sales growth outlook does not look anywhere near as bright as it did back then. It therefore can no longer be priced as a growth stock. For now, Generac stock is still not entirely enticing as an investment opportunity, although it is getting there and some factors may emerge that may change its outlook for the better going forward.
Generac's latest results paint a mixed picture, while sales could see a slight dip this year
This year's sales guidance suggests that Generac's impressive sales growth pace may have peaked last year. Based on last year's potentially all-time high sales volumes, Generac recorded an adjusted net income of $539 million, on full-year revenues of $4.56 billion. The adjusted net earnings number came in at almost 13% higher compared with last year, while revenues came in just over 22% higher. In other words, profit margins were somewhat sacrificed in favor of sales growth. I expect this trend will continue and accelerate going forward, as the pressure to at the very least defend current sales volumes will grow.
Other trends of note, include a worsening of the debt situation.
The current level of debt relative to revenues is not high, at just about one-third of 2022 revenues and about two and a half times higher compared with net income. At the same time, the fact that we are seeing a trend of rising debt is something that needs to be closely monitored.
Generac's business model and product line-up match well with the trend of a growing desire for personal household self-reliance
The concept of national or regional self-sufficiency has become a trendy concept this decade. First, there was the COVID crisis which exposed the dangers of national economies being overly reliant on global supply chains to produce just about anything. Then, came the change in geopolitical postures, from a collaborative environment, systematically sliding deeper into a new confrontational phase between countries, breaking down mostly into two groups, pitting mature, developed economies against developing nations that are increasingly asserting themselves economically and geopolitically.
For a while, there was a widespread belief that a desire for a higher degree of household-level self-sufficiency will become trendy as well, starting with the public reaction to the COVID crisis. It is what led to the meteoric 500% rise in Generac's stock price between the beginning of 2020 and the end of 2021.
A realization towards the end of 2021 that the crisis is dissipating and there is no need to prepare for a near-apocalyptic breakdown in economic and social activities, led to its stock retracing all the way back to its end-of-2019 levels. The whole episode gave rise to a new paradigm. We are now collectively assuming that the desire for higher levels of household self-sufficiency has been broken. The stagnation in Generac's sales may be a confirmation of the validity of the new paradigm.
I personally do not believe that the growing desire for self-sufficiency has dissipated. It is just not going to be the explosive trend that many people expected to see. It is also not directed exclusively at providing emergency electrical power, which is what Generac generators are meant to mostly do.
Households are probably more interested in solutions that address longer-term concerns. 10,000 Watt generators are estimated to take 4 to 8 gallons of propane per day, assuming very minimal use of just a few hours per day. An 80-gallon propane tank would therefore last a typical household no more than 10 to 15 days in a prolonged emergency, after which the generator becomes useless in the absence of one's ability to continuously refill the propane tank at least twice per month.
Such generators are perfectly fine if one is preparing for the most common source of power grid disruptions, namely temporary weather-related grid damage. If however one is considering other factors, such as power grid sabotage actions, terror attacks, war, or other human activity-related disruptions, it is not a viable solution. Generac does have the PWRcell Solar + Battery Storage system , which has the potential to provide households with longer-term autonomy if needed. It remains to be seen how much of an impact such products may have on its longer-term sales growth and profits trajectory.
While there continues to be a solid market for temporary power outage solutions, the market for such products might be enough to at best keep Generac's sales steady, nothing more. The growth industry is more likely to be found in products that offer longer-term independence. Ideally, such products should also provide steady household energy cost savings. Rising electricity costs make such systems as the PWRcell more attractive to consumers.
It becomes a potential defense against power loss, as well as a matter of increasing one's long-term financial safety by helping households insulate themselves from any further potential future hikes in electrical power costs.
Investment implications:
I highlighted my interest in Generac stock last fall when it was trading at a level about 35% higher than its current stock price. At the time, I saw an opportunity to wait and potentially enter at a more advantageous point, which back then I saw as meeting my preference to start building a position right around the price point it has been trading at in the past few months. I currently continue to hesitate, because I want to see more evidence of Generac's ability to potentially increase its solar power system sales, alongside its more traditional hydrocarbon fuel-powered generators. Looking at some of its issues, including the expected deceleration in sales growth this year, as well as technical issues with its solar power systems, it may be the case that this stock has some more potential downside this year. In the absence of any additional negative developments, I am currently looking for an entry point that would be more advantageous, perhaps when its P/E ratio gets closer to 5, from 6 currently.
For further details see:
Generac Could Be On The Cusp Of A Long-Term Rebound, But It's A Hold For Now