Generac Holdings Inc. (GNRC): Special Dividend, Secondary Offering, & Growth Prospects

Management gave guidance at the end of last quarter of low-to-mid teen revenue growth and 2Q13 sales to grow by 30-35%. Their guidance does not assume any additional significant storms. Large storms add an additional 200-400bps to sales following the storm. These storms can push estimates higher and occur with somewhat high frequency. There is likely a certain degree of this built into the valuation multiples.

Competitors

Other companies in the generator market include Cummings (CMI) and Briggs & Stratton Corporation (NYSE:BGG). Both of these companies make engines and power generation equipment. Caterpillar Inc. (NYSE:CAT) is also a player but contributes a smaller portion of earnings. Cummings is a major international player in power generation but also manufactures diesel engines for use in construction equipment and trucks. Briggs & Stratton also has other businesses, such as manufacturing pressure washers, lawn mowers and snow blowers.  Briggs & Stratton has quite small operating margins at 4% and a small ROA of 2.8%.  Caterpillar, on the other hand, has operating margins of about 12% and a higher return on assets too.  To see a table comparing the competition, click here.

Conclusion

Cummings and Briggs & Stratton are valued close to Generac Holdings Inc. (NYSE:GNRC) based on some multiples but the shares of GNRC look like they are at least fairly valued at this time given its FCF generation and growth prospects. The stock is attractive to investors that believe in the secular story of increasing residential and commercial penetration in the US. In this scenario, the profile fits that more of a growth stock versus a cyclical. This deserves a higher multiple; a range of 10x-12x NTM EBITDA seems fair.

The article Special Dividend, Secondary Offering, & Growth Prospects originally appeared on Fool.com.

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