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The average U.S. electricity customer lost power for more than 8 hours in 2020. This is an increase of more than 100% from 2013.
Alamy
In theory, record heat waves, wildfires in the West, power outages and storms should be good news for generator manufacturers.
Generac Holdings
.
But its stock has plummeted this year, and that provides an opportunity for investors to buy a growth stock at a comparable share price.
Waukesha, Wis.
Generac
(code: GNRC) is the dominant name in the field of residential backup power generation, with about three-quarters of the US market. This revenue accounts for about half of the company’s revenue, with the rest coming from commercial and industrial customers, as well as from the maintenance of those generators.
I wonder about that
Generac
known as a storm stock. When Superstorm Sandy hit the Northeast in 2012, Generac’s revenue skyrocketed to $1.5 billion in 2013, nearly double what it was two years earlier. From there, Generac just kept going. “Any event related to an outage, including hurricanes, outages, utility failures, whatever, drives awareness and therefore increases sales,” said Baird analyst Mike Halloran. sell.
In some places, the company’s backup generator is considered a necessity. Jonathan Skyrme of Trumbull, Conn., has a 10-kilowatt propane generator system, large enough to run most of his house in the event of a power outage. That’s not uncommon in the rural areas of Skyrme, where branches from old Norwegian maps seem to fall every time the wind blows. “I like the idea of my system,” he said. “It’s reassuring to know it’s there for the next big weather event.”
These days it’s not just bad weather that leads to power outages. Wildfires in California can keep people without power for days, while grid problems have knocked out power in Texas when it’s needed most.
Everything is getting worse. The average U.S. electricity customer experiences more than 8 hours of outage in 2020, according to the most recent data available. This is up more than 100% from 2013, the year the Energy Information Administration first began collecting data.
Only 6% of households in the US own a generator, and expanding that number by just one percentage point means creating an additional $2.5 billion in a trusted market for Generac. That helps explain why the company was able to grow sales by 340% and earnings by 664% between 2012 and 2022, including estimates. Now, California looks like an untapped market that could spur new growth for Generac.
“California has not historically been a home backup generator market,” said Credit Suisse analyst Maheep Mandloi. Less than 2.5% of those homes have backup power. For example, states in the Northeast have penetration rates between 10% and 20%.
Still, Wall Street is treating Generac as a bad stock. Its stock fell 50%, to $175.83, in 2022, making it the 16th worst-performing stock in the S&P 500 this year.
Part of the problem is that Generac is a growth stock that won’t go up much next year. While revenue is expected to hit $5.2 billion in 2022, up 39% from 2021, Wall Street is expected to grow just 9.4% for 2023. Slowing growth has put investors on edge. Growth investing dumps stocks and it takes time before value investors feel comfortable jumping in.
Generac stock may be getting close to that point. Consider that by mid-2021, Generac stock was trading at 40 times next year’s estimated earnings, double the S&P 500’s already expensive multiple of 20. The stock now trades for just shy of 20. 13 times estimated 2023 earnings, a discount to the broader market. The stock may have been too expensive in 2021, but it looks too cheap right now.
It’s not as if the company’s growth is disappearing. Wall Street expects sales and earnings to grow by an average of 10% and 16% in 2023 and 2024, respectively. This is much faster than the market, which is expected to grow earnings at a rate 7%. That also follows a historical pattern for Generac. After Hurricane Sandy, sales were steady from 2013 to 2016, but 2022 sales are expected to more than triple their 2013 levels.
The greening of power generation has raised some concerns about obsolescence; If everyone had solar panels on their roof, no one would need a generator. Credit Suisse’s Mandloi says solar panels and battery storage still cost more than double the cost of a Generac system. And the battery can run out if the power outage lasts too long.
Generac is also investing in clean technology. It has acquired companies involved in energy storage, solar inverters — electrical devices that convert the sun’s direct current into alternating current for homes — among other products. help dealers sell more when they introduce backup power products to potential customers.
“The clean energy business is still in growth/development mode,” said Baird’s Halloran. “We believe it is the person who creates long-term value for the company.”
Generac doesn’t have to go back to its former peak to be a good investment. Mandloi has a $395 price target for the stock, one of the highest prices on the Street. Halloran’s target is a modest over $275 a share, well below analysts’ average target of $340. But even at Halloran’s lower end, Generac stock will rise more than 50% – and trade only at 20x earnings in 2023, a huge discount from the nearly 26x three-year average.
At these levels, Generac looks like a great way to power up any portfolio.
Write letter for Al Root at [email protected]
