Climate Change Powers Generac Growth

In 2022, Hurricane Irma slammed into Florida, destroying homes along the coast from Fort Myers to Daytona Beach.

One of our staff, who lives in Orlando, saw his house flooded up to half a foot from the heavy rainfall.

Had his power not gone out during the storm, his pump systems would likely have kept the water out.

$18,000 later, he has a full-home Generac (GNRC) generator to keep him up and running for at least a week.

Intense storms are becoming more frequent, with Texas being the latest casualty.

As we transition to green energy, backup systems become more important.

Generac is the most well-known backup generator supplier in the U.S. And with a series of acquisitions, it’s expanding internationally.

Make no mistake, this stock has been on our watchlist for a while.

The latest surge in search data from financial pros shown below made us take another look at the stock that could power the future of your portfolio.

Generac’s Business

Keeping it simple, Generac provides power backup systems and accessories for residential and commercial markets. This includes mentoring devices, platforms and controls, and distributed energy resource management.

Source: GNRC May 2023 Investor Presentation

U.S. residential customers make up the majority of sales.

Generac’s serial acquisitions since 2017 aim to improve their technology while increasing international market penetration.

Source: GNRC May 2023 Investor Presentation

Generac’s the beneficiary of several mega trends from climate change initiatives to more folks working from home.

Source: GNRC May 2023 Investor Presentation

Financials

Source: Stock Analysis

Sales exploded during the pandemic as folks began working from home, finally abating in 2022.

Gross margins began to slide in 2022 as inflation and labor shortages hit the company’s bottom line.

Generac holds $1.6 billion in net debt, about 5x their best annual operating cash flow.

Additionally, the company’s interest expenses doubled from $33 million to $68 million from 2021 to 2022, cutting operating cash flow by roughly 10%.

However, management plans to pay a lot of that down this year.

Valuation

Source: Seeking Alpha

We compared GNRC to diversified industrials as there isn’t another publicly traded company as narrowly focused as them

For example, 3M (MMM) and General Electric (GE) are more industrial conglomerates. And both are better values in terms of P/E and Price-to-cash flow ratios.

However, the forward price-to-cash flow ratio for GNRC is ~10.4x, which is much better than last year’s and more in line with GE and MMM’s forward price-to-cash-flow ratio.

Growth

Source: Seeking Alpha

Now, we mentioned the significant revenue growth GNRC saw over the last few years. That’s slowed down but still expected to be positive. You can’t say the same for all its peers.

The 3-YEAR CAGR for EBIT and EBITDA compared to YoY or forward illustrate our point on looking at GNRC over multiple years rather than a single period. 

Profitability

Source: Seeking Alpha

GNRC’s gross margins were closer to MMM as recently as last year. The focus for the company should be improving that area as they expand.

Management highlighted this in the last earnings call, noting they expect full-year 2023 gross margins up 1.5% from 2022, while the second half would be up 5% over the first half, largely driven by seasonality.

Our Opinion 10/10

At first blush, there might not seem much here. 

However, the company’s riding some megatrends. Ask anyone looking for a home backup system, and Generac is probably the recommended brand.

We don’t expect margins to deteriorate further, with sales mixes improving them over the next year.

While the company isn’t likely to see the massive growth it did during Covid, the increase in climate disaster frequency should keep demand for their products consistent for years to come.