2023-06-01 16:44:42 ET
Summary
- Experts predict a near-average hurricane season for 2023, which can impact businesses such as Generac, a leading designer and manufacturer of standby and portable generators.
- GNRC has beaten earnings expectations in 11 of the last 12 quarters and is expected to be free cash flow positive this year.
- Despite its high volatility, GNRC's valuation is attractive given robust trends beyond this year, and the stock has historically outperformed the S&P 500 starting in early June.
- I outline key price levels to watch.
Summer isn’t officially here, but the Atlantic hurricane season is. June 1 through November 30 is when weather enthusiasts like me stay abreast of the goings on across the Gulf of Mexico, the Caribbean Sea, and the “Main Development Region” of the Atlantic Ocean. For 2023, experts call for a near-average season in terms of total tropical cyclones and overall Accumulated Cyclonic Energy.
What does all that meteorology jargon have to do with investing? More than you might think. With more billion-dollar disasters in the United States seemingly every year, hurricanes, droughts, heat waves, cold outbreaks, and even just solar and wind power generation all impact the business world.
I have a buy rating on shares of Generac (GNRC). It’s perhaps the most impacted company by severe weather events, and you can be sure that when a major hurricane is barreling toward the domestic coastline, volatility starts to tick up with the stock.
A Near-Normal 2023 Hurricane Season Expected
According to Bank of America Global Research, Generac is a leading designer and manufacturer of a broad class of standby and portable generators. The company holds an estimated 80% market share in the North American residential standby generator market. Generac has also recently invested in a backup solar energy storage business that is growing rapidly, while also maintaining a large commercial and industrial business that accounts for about 40% of sales.
The Wisconsin-based $6.8 billion market cap Electrical Components and Equipment industry company within the Industrials sector trades at a high 28.6 trailing 12-month GAAP price-to-earnings ratio and does not pay a dividend, according to The Wall Street Journal.
A month ago, GNRC topped analysts’ earnings estimates despite reporting a 22% year-on-year revenue decline. The backup generator firm beat on the top line while core sales, net of acquisitions and FX changes, fell 24%. The management team reiterated a net margin outlook of 7.5% to 8.5% for FY 2023 while its EBITDA margin is still seen in the 17% to 18% range. A key risk, but also an opportunity, is the company’s inventory which remains high post-COVID.
So, channel sell-through is still a challenge at both the residential and C&A level. On the positive side, days of channel inventory stood at 1.4x to 1.5x as of the end of Q1, and that is expected to return to normal levels by the end of Q2. Should economic and consumer conditions worsen, then a guidance cut could come in the August report or even at the upcoming shareholders' meeting.
On valuation , analysts at BofA see operating earnings falling sharply this year but then flipping on the bullish switch in 2024. The Bloomberg consensus forecast is more upbeat about the company’s profitability. Even with positive free cash flow seen this year, the company is not expected to issue dividends any time soon. If we use normalized next-12-month earnings of $6 and apply a 23 P/E multiple (a discount to GNRC’s 5-year average multiple of 27.5), then the stock should trade near $138. Even with a 10% margin of safety, shares are attractive on valuation in my view given robust growth trends beyond this year.
Generac: Earnings, Valuation, Free Cash Flow Forecasts
GNRC: A Depressed Valuation Relative To History, But Not Dirt Cheap
Looking ahead, corporate event data provided by Wall Street Horizon show an unconfirmed Q2 2023 earnings date of Wednesday, August 2 BMO. Before that, some volatility could swirl around its annual shareholders’ meeting on Thursday, June 15.
Corporate Event Risk Calendar
The Options Angle
Digging into the profitability picture, data from Option Research & Technology Services (ORATS) show a consensus EPS forecast of $1.16 which would be a 61% decline from $2.99 of per-share profits earned in the same quarter a year ago. After a pair of bottom-line beats, though, there have been three analyst earnings upgrades since the Q1 report was released. Moreover, Generac has beaten earnings expectations in 11 of the last 12 quarters. The stock tends to trade with high volatility after reporting.
This time around, with implied volatility readings near 50%, the options market has priced in a high 9.5% earnings-related stock price swing when analyzing the at-the-money straddle expiring soonest after the Q2 report. With the stock stabilizing after a major freefall, I would expect lower IV – so selling premium during the summer months makes sense to me.
GNRC: A High-Volatility Industrials Stock, Solid EPS Beat Rate History
The Technical Take
GNRC is not for the faint of heart. The bears have been in ‘charge’ since the stock notched its all-time high above $500 in late 2021 when interest rates troughed and speculative fervor gripped markets. After a more than 80% drawdown in barely more than a year, the stock seems to have found its footing. But are the bulls about to power the Industrials name? I assert that’s the case.
Notice in the chart below that GNRC notched a higher low off the late 2022 low in advance of the early May earnings report. With a declining 200-day moving average, there’s much work to do. Moreover, the low $140s area is a key spot for the bulls to navigate. Longer-term, I see resistance around the $200 mark based on the Q2 2022 lows. For now, long with a stop under $90 looking like a good risk/reward play.
GNRC: Shares Stabilizing, Monitoring the Q2 Low For Support, $140 Resistance
Bonus Chart
GNRC also makes sense from the long side given seasonal trends. The chart below from Equity Clock shows that in the last 12 years, the stock has outperformed the S&P 500 from right now (early June) through late October. So, over the course of this hurricane season, GNRC can light up your portfolio if the long-run seasonal trend plays out.
GNRC: Bullish Seasonal Trends Through October
The Bottom Line
Puns aside, I like the valuation situation on Generac today. After its massive drop over the last 18 months, the stock appears to have found technical support, too.
For further details see:
Power Up Your Portfolio With Generac, Shares On Sale