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In this blog post, we will take a closer look at Generac’s business model, growth drivers, competitive advantages, financial performance, and valuation. We will also discuss why we think Generac Stock is a high-powered investment opportunity for long-term investors.

Generac Holdings Inc. (NYSE: GNRC) is a leading manufacturer of power generation equipment and energy storage systems.

The company offers a wide range of products, including portable generators, home standby generators, industrial generators, solar panels, batteries, and smart grid solutions.

Power Solutions for Generac Stock

Generac has been benefiting from the growing demand for backup power solutions, especially in the wake of natural disasters, power outages, and grid instability.

The company has also been expanding its presence in the clean energy market, leveraging its expertise in energy management and storage.

Business Model

Generac operates through three segments: Domestic, International, and Other. The Domestic segment accounts for about 80% of the company’s revenue and includes sales of power generation equipment and energy storage systems in the U.S. and Canada.

The International segment accounts for about 15% of the revenue and includes sales of power generation equipment and energy storage systems outside of North America.

The Other segment accounts for about 5% of the revenue and includes sales of capacitors, transformers, and other electric components.

How Generac Works

Generac sells its products through a network of distributors, dealers, retailers, e-commerce platforms, and direct sales channels.

The company also provides installation, maintenance, repair, and warranty services for its products. Generac serves a diverse customer base across various end markets, such as residential, commercial, industrial, telecom, healthcare, government, and military.

Growth Drivers

Generac has been growing its revenue at a robust pace over the past decade, driven by several factors:

  • Increasing frequency and severity of natural disasters, such as hurricanes, wildfires, floods, and earthquakes, that cause widespread power outages and damage to infrastructure.
  • Aging and unreliable power grids that are vulnerable to cyberattacks, blackouts, brownouts, and voltage fluctuations.
  • Rising consumer awareness and preference for backup power solutions that can provide safety, comfort, convenience, and peace of mind during emergencies.
  • Growing adoption of renewable energy sources, such as solar and wind, that require energy storage systems to balance supply and demand.
  • Favorable regulatory policies and incentives that support the development of clean energy and distributed generation.
  • Innovation and product development that enhance the performance, efficiency, reliability,
    and affordability of Generac’s products.

Competitive Advantages

Generac has several competitive advantages that enable it to maintain its leadership position in the power generation equipment and energy storage systems market:

  • Strong brand recognition and reputation for quality, durability, and customer service.
  • Wide product portfolio that caters to different customer needs and preferences.
  • Diversified geographic presence that reduces the exposure to regional risks and fluctuations.
  • Extensive distribution network that ensures availability and accessibility of Generac’s products.
  • Loyal customer base that provides recurring revenue from service contracts and repeat purchases.
  • Economies of scale and operational efficiency that lower the cost structure and improve the profitability.
  • Research and development capabilities that foster innovation and differentiation.
  • Strategic acquisitions that expand the product offerings and market reach.

Financial Performance

Generac has been delivering impressive financial results over the past few years.

In 2020,the company reported revenue of $2.5 billion, up 12% year-over-year. The revenue growth was driven by strong demand for home standby generators in the Domestic segment and solar inverters in the International segment.

The company also reported adjusted earnings per share (EPS) of $6.75, up 28% year-over-year. The EPS growth was driven by higher revenue, improved gross margin, and lower interest expense.

In the first nine months of 2021,the company reported revenue of $2.7 billion,up 57% year-over-year. The revenue growth was driven by continued strength in home standby generators, surging demand for portable generators due to severe weather events, and robust growth in clean energy solutions.

The company also reported adjusted EPS of $8.84, up 91% year-over-year. The EPS growth was driven by higher revenue, improved gross margin, and lower effective tax rate.

Valuation

Generac’s stock has been on a stellar run over the past year,
rising more than 150% from $100 to $250 per share.

The stock currently trades at a forward price-to-earnings (P/E) ratio of 29,
which is higher than the industry average of 25. However, Generac deserves a premium valuation given its superior growth prospects, competitive advantages, and financial performance.

It is estimated that Generac’s fair value to be $300 per share, implying a 20% upside potential from the current price. We use a 10% discount rate and a 15% terminal growth rate in our DCF model.

We assume Generac will grow its revenue by 25% in 2021, 20% in 2022, and 15% thereafter.We also assume Generac will maintain its adjusted net margin of 18% and its free cash flow conversion of 90%.

Leading Player

Generac is a leading player in the power generation equipment and energy storage systems market. The company has been benefiting from the growing demand for backup power solutions and clean energy solutions.

The company has also been delivering impressive financial results, with strong revenue and earnings growth. We think Generac is a high-powered investment opportunity for long-term investors who are looking for exposure to the power and energy sector.

We rate Generac as a buy with a fair value of $300 per share.

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