Generate Big Returns with Generac Holdings Inc. (GNRC)

Cummins Inc. (NYSE:CMI) and Honda Motor Co Ltd (ADR) (NYSE:HMC) are two competitors in the generator space. Cummins designs, manufactures, and distributes engines and engine related parts worldwide. Cummins operates in four segments: engines, power generation, components, and distribution. They operate in 190 countries, have 500 distribution facilities, and work with over 5,200 dealers. With a market capitalization of around $26.5 billion, Cummins is over $23 billion larger than Generac. This gives Cummins an advantage, because if they were to go all-in in the generator space, they could easily lower prices below Generac’s. However, I think a move like this would make Generac a very intriguing takeover target. This would be a win-win for both companies.

Honda Motor Co. designs and manufactures automobiles, motorcycles, and power products worldwide. Portable generators are one of the power products they manufacture. Honda has a much wider range of generators than Cummins, from small 1,000 watt engines that can run a fan to a 10,000 watt engine that can run a home’s heating system. Honda is another company that could benefit greatly from taking over Generac, but they have shown more dedication to their automobiles than they have to the generator space. When most people think of Honda, they think of cars and lawn mowers, not generators.

Generac is the best play on generator sales because generators are what they do. Cummins and Honda are involved in many different markets, while Generac continues to focus on the one. The reason Generac is a great investment is because of the high demand of their products right now. This would be a play on earnings for 2013 and possibly longer if disaster continues to strike. Generac is currently trading at $40.54, which is just 2.08% below its 52 week high reached days ago. They have beaten analyst expectations the last 6 consecutive quarters and should have no problem keeping the streak alive. This company is set to report 2012 fourth quarter earnings on Feb. 14. I am initiating an outperform call for Generac Holdings (NYSE:GNRC) on CAPS and will be looking to start a long position in this stock on any weakness. I believe a pullback around $36 would be a perfect entry point. Generac Holdings is a BUY.

The article Generate Big Returns with this Top Stock originally appeared on Fool.com and is written by Joseph Solitro.

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