Generac ( NYSE: GNRC ) was downgraded by more analysts after the maker of backup generators warned that its earnings had shrunk amid a drop in revenue. The warning on Wednesday triggered a 25% drop in its stock price, the biggest decline in data going back 12 years.
Analysts at Roth Capital cut their investment rating on Generac by two steps to a Sell from a Buy, while Keybanc lowered the stock to a Sector Weight from Overweight.
Generac is among the manufacturers of building products that are being negatively affected by weakness in the housing market as the Federal Reserve raises the cost to borrow. Investors who are optimistic about Generac’s future earnings potential point to the demand for generators and backup systems in regions where extreme weather strains power grids.
In downgrading its rating on Generac, Roth Capital said the company may face bigger costs to repair clean-energy products that are under warranty. Generac said its net income includes pretax charges of $55 million, including $37 million of warranty-related matters and $18 million of bad-debt expense after a customer filed for bankruptcy.
Roth Capital said warranty-related costs could be in the range of $54 million if Generac has to pay about $1,800 each to repair an estimated 30,000 PWRcell solar-battery backups.
“Yesterday's news about the warranty expense and bad debt did not surprise us,” Philip Shen, analyst at Roth, said in a note. “That said, we believe the downside risk for the clean energy business could still be worse than expected.”
Generac announced that it expects to report a 15% gain from a year earlier in Q3 revenue to $1.09 billion, less than the consensus estimate of $1.34 billion. The company also said adjusted EPS for Q3 would be $1.75, compared with average estimate of $3.22. In addition, Generac’s guidance for EBITDA of $183.8 million was less than the consensus of $306 million.
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Generac downgraded at Keybanc, Roth Capital after earnings warning