This article is proudly sponsored by Lake Region State College!

About Generac

It was an early morning in my favorite place in the whole wide world, Houston, Texas.

The usually temperamental short spurts of rain and the eventual sunrise shined on my face, and all was good, but then the temperature dropped like a rock and the lights abruptly turned off while I was taking a shower.

Too much information? Eh, don’t worry I’ll leave that part at that.

My family and I had to instantly devise some sort of plan to escape the bursting pipes, the exponentially, frighteningly turning weather and through the snow sludge, misfunctioning street lights, swerving vehicles, and through some very nimble, cautious driving, we found some slight refuge in a land a few hours away, set as the home of the Aggies, where else but College Station, Texas.

My mother and I visited a local grocery store in the area in attempts to store up on some essentials such as non-perishable foods and some toiletries as well, however, were unpleasantly greeted by a packed store with bare shelves, which frankly was quite a wake up call to the severity of the situation we and millions of others were in.

Of course, we always count our blessings and have zero issues acknowledging that there are many, many others that didn’t have as good of an outlet or means of escape as we did, however, being surrounded by empty shelves certainly took a slight mental toll on myself and my mother.

Thankfully, we got through it, and we simply will not get started on how many people, government entities and other organizations dropped the ball and failed Texans all across the state.

Yes, I said that and I meant that.

While this story might seem somewhat random at first, it lead me to doing a little research and like the local Kroger, we presume a company such as Waukesha, Wisconsin-headquartered Generac had some similar difficulties in keeping its inventories stocked as well during this phenomenon, as demand for the company’s products undeniably surge like there’s no tomorrow during tragic, extraordinary events such as this one.

That is, Generac is primarily in the business of designing, manufacturing and selling generators, which for those who aren’t familiar, is basically a secondary, sometimes portable system that can be used to regenerate power or in getting something back up and running again, such as a home’s electricity, not to mention that the company’s products can be used for a wide variety of other, more industrial applications like in the context of a construction site or real estate development, or pretty much any other physical location that needs a new source of electric-generating power, perhaps something as non-mission critical such as widespread light coverage on a site.

In the context of the previously mentioned winter storm, many homeowners and businesses were in dire need of such a mechanism or piece of mission critical equipment, and following the storm, many have likely invested in a few of these generators, acting as a sort of form of insurance, in the event that yet another frankly brutal storm hits unsuspecting Texans once again.

This is one of the reasons we think the company’s primary product line(s) are quite resistant to recessionary pressures, as someone is far more willing to shell out a few thousand dollars one time on a Generac machine or two than losing power or perhaps business prospects due to not having a source of electricity.

Fear tends to be an excellent motivator, all things considered.

That is what Generac does in a nutshell, and that is essentially the crux of what we know thus far about the company, but what we really want to know more about is this company’s financials, and whether or not its stock (NYSE: GNRC) appears to be a viable, attractive long-term investment prospect.

Generac’s stock financials

According to its present market capitalization, Generac is a $7.22 billion company with an affiliated share price of $117.46 as well as an annually distributed dividend of zero dollars and zero cents and an even more telling price-to-earnings (P/E) ratio of 46.11.

Generally speaking, no dividend, no problem is our policy, and we especially understand this for a company such as this one, as we really do think it needs to hold onto as much cash as it can so as to sufficiently deal with the ever so present wild swings in supply and demand within the generator market, especially preceding or during a weather catastrophe.

Plenty of cash on hand is best in this business, no doubt about it, and a dividend would act as a sort of unnecessary drain, from our vantage point.

However, an initial sticking point certainly lies within the company’s current price-to-earnings ratio, as Generac’s stock (NYSE: GNRC) is seemingly trading at a premium valuation, at least when referencing the commonly held fair value benchmark of 20 in comparison to the company’s present price-to-earnings ratio of nearly 50, indicating that the company’s stock has gotten ahead of itself and perhaps still has some coming down to earth to do.

Nevertheless, who knows, it might be worth paying a sizable premium for if the company’s growing, for instance, on the basis on annualized revenues, as many investors are comfortable paying for such a growth story, however, for such a seasoned company, we aren’t initially confident in this being the case and this is most definitely one of those times where we hope that we are in fact wrong.

At any rate, let’s do our best in uncovering more about this company and its core financials and other related metrics, specifically as it relates to its balance sheet.

Generac’s executives are in charge of tending to and taking care of just about $5.2 billion in terms of total assets along with around $2.9 billion in terms of total liabilities, which is a fine overall balance sheet breakdown, displaying this company being firmly total asset-heavy but also still having some debt(s) to pay down over time, some of which hopefully is being used to kindle and/or further streamline internal and external growth initiatives within the company.

Nothing to really see here, as this is a fine balance sheet position for a company such as Generac, all things considered.

Regarding the company’s income statement, Generac’s total annual revenues since 2018 have seen some steady and even a hint of recent exponential growth, which in a purely objective financial context, is a great thing to see, and it is also certainly in-line with all of the recent weather-related storms and disasters, naturally boosting the company’s sales from a relative base of just north of $2 billion (2018) to its most recently reported revenue figure of $4.5 billion (as reported in 2022), growing each and every year between.

While these are some strong growth figures, we still do not presently deem this to be a substantial enough amount of growth firepower to warrant paying this much of a premium for an ownership position in the company through its common stock, as again, we hold it to be our opinion that the company’s stock (NYSE: GNRC) is still a bit too full of itself at the moment, even considering our additional perspective that we think it will continue growing revenues in the intermediate-term.

Moving right over to the company’s cash flow statement, Generac’s net income and total cash from operations (also measured during and between 2018 and 2022) have been fairly consistent, but really low, at least as they compare to the company’s aforementioned annual revenues, leading us to believe that this company’s trailing twelve month (TTM) net profit margin is far from exhilarating.

Ok, that was sort of a strong word, however, for a company that has been around since 1959 and being that it is a well established leader within the portable power generation segment of the economy, we would’ve hoped for stronger cash flows from this business, as, for example, Generac’s total cash from operations have consistently stood at and around the low-to-mid hundreds of millions, peaking out at a relative high of $487 million, as reported in 2020, which was, of course, an era filled with winter storms and other natural disaster alike.

Generac’s stock fundamentals

Inserting some more clarity into Generac’s cash flows and its ultimate ability to turn a positive TTM net profit margin, it would be wise if we deferred to the figures displayed on TD Ameritrade’s platform, which just so happen to peg Generac’s TTM net profit margin at a low but still comparably impressive 4.85% to the industry’s listed respective average of -60.28%, speaking a bit to the company’s industry leadership and product prowess, although, again, slightly under 5% is not a whole lot for such an established entity within the generator industry.

Perhaps the margins for generators aren’t as lofty as we had anticipated them to be.

But, we will for sure count our blessings and give credit where credit is rightfully due, and we do tip our hats to Generac’s ability to handsomely out-profit the industry average by such a notable margin.

Now, regarding the company’s TTM returns on both assets and investments and how they stack up against the competition’s averages, they aren’t as bad as they could’ve been and they are actually pretty much just about what we initially expected, both of the company’s metrics on these fronts trailing slightly behind the industry’s respective averages, which makes a degree of sense given just how much larger and more operationally established Generac is, maintaining a little less on the return spectrum due to all of the operations and other moving pieces the company runs on a daily basis, hampering its returns with respect to smaller manufacturers and operators.

As long as the discrepancy in this respect isn’t too wide, we aren’t going to put too much weight on these return metrics, but rather simply keep them in the back of our minds when putting all of the pertinent facts together.

Should you buy Generac stock?

Speaking of the pertinent facts, Generac is evidently one of those companies that is very important for society, not merely selling a discretionary range of products but really, in certain instances, products that can act as differences between life and death.

And for that, we certainly think Generac does a lot of mission critical work and for that we appreciate them, however, on a strict financial basis, the company’s stock (NYSE: GNRC) doesn’t really get us out of bed in the morning, as, sure, its overall balance sheet breakdown is in solid condition (no worse, no better), but its valuation is way ahead of itself and while there has certainly been some revenue growth behind this company, it simply hasn’t been enough in our eyes to adequately justify overpaying this much for the stock at the moment, its cash flows have been okay and with respect to the industry (on average), and its TTM net profit margin and core return metrics all point to the fact that Generac is the big shark in the portable power generation arena, which is all good to us.

But, alas, in the best interest of objectivity and fairness, now isn’t our favorite time to overpay for an ownership stake in an established, veteran company’s stock, and thus we feel obliged to give the company’s stock a “sell” rating for the time being, primarily due to its present valuation.

DISCLAIMER: This analysis of the aforementioned stock security is in no way to be construed, understood, or seen as formal, professional, or any other form of investment advice. We are simply expressing our opinions regarding a publicly traded entity.

© 2024 MacroHint.com. All rights reserved.