Generac can heat up your portfolio this winter

Key Points

• Generac is the largest manufacturer of home generators in the United States, but it also makes commercial and industrial generators for offices, telecoms, data centers, hospitals and buildings.
• The 2024 winter is expected to be more frigid and frosty than years past, according to the Farmer's Almanac.
• Generac is finally seeing dealer inventories normalize, which is leading to an upswing in business.

Generac Holdings Inc. NASDAQ: GNRC manufactures power generators and energy management solutions for residential, commercial and industrial markets. It's a member of the industrial sector. While they are popular with consumers for their portable backup power generators pitched often through infomercials, the Company also carries large installed generators for homes and offices to hospitals, data centers and telecoms.

Backup power generation is becoming increasingly vital with the aging power grid and electrification trend. The Company continues to grow its clean energy offerings as many of its generators can operate on diesel, natural gas and solar. The Company is seeing signs of normalization in dealer inventories, which bodes well for future sales and margins.

The infrastructure tailwind

The aging power grid continues to be a problem that gets exacerbated during storms and natural disasters. Nearly half of the nation's powerlines were installed over 50 years ago. This has resulted in the creation of the $10.5 billion Grid Resilience and Innovation Partnership (GRIP) program as part of the Bipartisan Infrastructure Law of 2021. GRIP is designed to fortify the nation's power grid to withstand extreme weather and climate change.

It also funds the acceleration and deployment of transformative projects aimed at ensuring the reliability of the power infrastructure. Generac commands a 60% market share of telecom backup generators. It competes with heavy machinery and industrial generator manufacturers like Cummins Inc. NYSE: CMI and Caterpillar Inc. NYSE: CAT.

Surging Commercial & Industrial sales

The largest area of post-COVID normalization for Generac was in the dealer inventory channels. These levels have finally started to normalize as the revenue declines slowly. On November 1, 2023, Generac released its fiscal Q3 2023 results for the quarter ending in September 2023. The Company reported an earnings per share (EPS) profit of $1.64, excluding non-recurring items, beating consensus analyst estimates for a profit of $1.55 by 9 cents. Net income was $60 million in the quarter compared to $58 million in the year-ago period. Adjusted EBITDA was $189 million compared to 184 million.

Revenues fell 1.6%  YoY to $1.07 billion, beating consensus analyst estimates of $1.04 billion. While Residential product sales fell 15% to $565 million, Commercial and Industrial (C&I) product sales jumped 24% YoY to $311 million. A 15% drop is an improvement from the 44% drop in residential sales it had in Q2 2023.

In-Line Guidance

Generac didn't stray from its earlier guidance. It continues to expect a 10% to 12% decline in sales for the full year 2023. Generators sales are expected to return to growth in Q4 2023. Adjusted EBITDA margins are expected to be between 15.5% and 16.5%, with net income margins lowered from 6% to 7% to 5% to 6%. Get AI-powered insights on MarketBeat.

Normalization continues to improve.

Generac CEO Aaron Jagdfeld commented that field inventories continue to "come down." End market demand is narrowing up, especially compared to the under-shipping earlier in the year. This has enabled the Company to focus on efficiency in terms of improving gross margin level and EBITDA margin.\

Jagdfeld commented, "The really good news is we continue to see end market demand remain quite strong for home standby. And that's in spite of it really kind of a light season relative to the third quarter here." He continued, "Outages in total were above average, the long-term average. And, of course, there were a lot of well-publicized articles around potential outages with some of the supply-demand challenges that remain out there."

Analysts upgrade

Generac shares received several upgrades as analysts noted that improving inventory levels is a turning point for the Company. On November 2, 2023, Stifel upgraded GNRC to a Buy from Hold and a $135 price target. On November 3, 2023, Guggenheim upgraded to a Buy from Neutral and a $142 target. On November 15, 2023, Bank of America upgraded to a Neutral, raising its price target from $76 to $110.

Generac Holdings analyst ratings and price targets are at MarketBeat. Generac Holdings peers and competitor stocks can be found with the MarketBeat stock screener. Generac shares traded at 23.89X forward earnings with a 6.69% short interest.

Daily symmetrical triangle breakout

The daily candlestick chart on GNRC illustrates a symmetrical triangle breakout pattern. Shares had already been surging since its Q3 2023 earnings report. The relative strength index (RSI) spiked up through the oversold 30-band. It continued to climb over the overbought 70-band and remained above that for over two weeks, rising through the daily 200-period moving average at $115.03. After peaking at $126.42 on December 6, 2023, GNRC drifted lower on lower highs and higher lows, forming a descending upper trendline versus an ascending lower trendline.

This resulted in a breakout through the upper trendline, squeezing back up to the $126.42 swing high and then gapping above, reaching $132.95. The very overbought RSI will eventually result in a pullback. Pullback support levels are at $118.63, $114.22, $108.55 and $104.33.