The National Oceanic and Atmospheric Administration is predicting an active to very active Atlantic hurricane season for the six months starting June 1 with a 70% chance of 3 to 6 major hurricanes (winds above 111 mph), more than double the usual three major hurricanes.
After Superstorm Sandy areas that never worried before about weather events are hyperaware. More people realize that areas far inland can be devastated by storm surge, microbursts, tornadoes, or flash flooding.
Your portfolio needs to be ready, too. Among several things FEMA is recommending to prepare for a weather emergency is install a generator. This has been an investable recommendation.
That leads to the usual suspect: Generac Holdings Inc. (NYSE:GNRC). Like the National Geographic Channel show Doomsday Preppers in which they rate each prepper’s strengths and weaknesses let’s rate Generac.
Strengths
- Over 60% of their sales are residential and they’ve benefited from an aging grid that drives power interruptions. Their residential/commercial dealers are clustered from Canada to Florida from the East Coast westward through Tornado Alley which comprises Kansas, Oklahoma, and Texas as well as some of the biggest blizzard regions.
- The company just presented at the KeyBanc Capital Markets Industrial, Investor Presentation on May 30 that one of their main opportunities is an underserved “optional” standby power market, your grocers, restaurants, healthcare and telecoms. Average cost for a supermarket in a four hour outage is over $26,000 and over $20,000 for a restaurant. Just four hours. For healthcare the dollar cost is lower but the human cost can be immeasurable.
- The company is planning their largest rollout of new products this year. The company just reeentered the power washer market in late 2012. Generac Holdings Inc. (NYSE:GNRC) is seeking to leverage the cheaper cost of natural gas as a power source for its generators and advertising to potential commercial and industrial clients the 35% cost savings with natural gas generators.
- In December 2012 they purchased Ottomores, a Latin American leader in standby power generation, for $45 million in cash on hand. With facilities in Brazil and Mexico City, expansion into the Latin American market is assured.
- Generac Holdings Inc. (NYSE:GNRC) has 70% market share of North American residential standby generators. Every major outage is an opportunity for another surge in sales as consumers become ever more dependent on stronger generators that can power more than just a fridge and some lights.
- The company has a history of generous special dividends with the last one of $6.00 paid out in Q2 2012 which was pretty hefty depending on what price you bought in. The company announced another special dividend of $5.00 which goes ex-dividend on June 12.
Weaknesses
- Generac Holdings Inc. (NYSE:GNRC) is not the undiscovered gem it was in early 2012. The maker of generators for residential, commercial, and light industrial buildings in North America has seen a storm surge of its own lifting it 69% in the last year. When New Yorkers and Jerseyites went without power for weeks it was a wake up call and the stock rose…dramatically. The stock rises and falls on weather news.
- Gross margins will be flat in 2013. They have been running at 37% for the last three years. Operational expense spending will increase slightly this year. This year they started their first national advertising campaign so this is a weakness and an opportunity.
- The company has several strong competitors with Briggs & Stratton Corporation (NYSE:BGG) and Cummins Inc. (NYSE:CMI) as the largest. All compete for share as every 1% increase in market penetration is a $2 billion opportunity in the residential market. Briggs & Stratton also competes in the Commercial & Industrial market.
Opportunities
- To gain commercial and industrial market share the company admits it needs to expand its products from a 600kW single engine genset to much larger capacity. There is a market for these larger backup generators as Generac Holdings Inc. (NYSE:GNRC)is not now addressing that 40% of the total backup power market.
- With the acquisition of Ottomores and a healthy Latin America jump-off platform the company is exploring expansion into Australia, Russia, the Ukraine, New Zealand, and Asia.
- The company has made three accretive acquisitions since 2011, Magnum Products (light towers, mobile generators and pumps), Gen-Tran (manual transfer switches and accessories), and Ottomores (bigger kW gensets and container gensets). Opportunities to make more acquisitions in target international markets are viable.
- Generac Holdings Inc. (NYSE:GNRC) presented at the KeyBanc Capital Markets Investor Presentation on May 30 that a big opportunity is an underserved “optional” standby power market… your grocers, restaurants, healthcare and telecoms. Average cost for a supermarket in a four hour outage is over $26,000 and over $20,000 for a restaurant. Just four hours. Considering the paper-thin margins of supermarkets and restaurants this can be quite a hit. For healthcare the dollar cost is lower but the human cost can be immeasurable. They just can’t afford it.
- New US construction and retrofitting with generators are huge markets the company is actively wooing.
Threats
- Free cash flow as a percentage of adjusted net income has been dropping from 97% in 2012 to 88% so far in 2013. However, the company believes this is quite strong enough to service debt. Interest expense on that debt has doubled from $23.7 million in 2011 to $49 million in 2012.
- Competitor Briggs & Stratton Corporation (NYSE:BGG) is already in 100 countries on 6 continents. It also has a backup income stream from its outdoor power equipment, snow blowers, lawn care equipment and such. It also has a fifty year headstart on Generac Holdings Inc. (NYSE:GNRC). But its last earnings release was quite disappointing with an 11% drop in net income.
- Briggs & Stratton is strong in Brazil, Generac’s newest market, and this was a lone bright spot for their Q3 earnings.
- Cummins Inc. (NYSE:CMI), the huge diversified industrial machinery company, has a lower trailing P/E at 15.38 than Generac’s 24.67 and the troubling 92.49 P/E for Briggs & Stratton Corporation (NYSE:BGG). However, Generac Holdings Inc. (NYSE:GNRC)’s PEG at 1.12 is the lowest with the most growth ahead.
Time to power up
Generac is still a great name to buy into the extreme weather season. Its generous special dividends are better than the regular dividends of Cummins Inc. (NYSE:CMI) at 1.70% and Briggs & Stratton Corporation (NYSE:BGG) at 2.10%. Its growth rate is better and it has a very bright future internationally. Before another tragic storm hits, get a generator and buy Generac.
AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool recommends Cummins. The Motley Fool owns shares of Cummins and Generac Holdings.
The article Batten Down the Hatches for a Generac SWOT Analysis originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
