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Generac Holdings: Umbrellas Sell Better on and After Rainy Days
Posted by: Mark Lin (IP Logged)
Date: November 28, 2012 09:03AM

Generac Holdings Inc. (GNC) is a leading designer and manufacturer of a wide range of generators and other engine powered products. As a leader in power equipment serving residential, light commercial, industrial and construction markets, Generac's power products are available through a broad network of independent dealers, retailers, wholesalers and equipment rental companies. The company markets and distributes its products primarily under its Generac and Magnum brand names.

Valuation

GNC is currently trading at a trailing 12 months P/E of 16.05 and a trailing 12 months EV/EBITDA of 9.67. GNC achieved a ROE of 25.4% over the past 12 months.

Financial And Business Risks

GNC is highly geared with a gross debt-to-equity ratio of 131% and a net gearing of 119%. This is partly mitigated by an interest coverage ratio of 3.1 and a trailing 12 months net debt-to-EBITDA of 1.9.

GNC's standby generator business works like a seller of umbrellas. People are more likely to buy umbrellas, if they experience being caught in the rain without one. Sustained periods without major power disruptions can lead to reduced consumer awareness of the benefits of standby and portable generator products and can result in reduced business for GNC. Demand is uncertain and may be affected by events beyond the company's control.

The market for onsite standby generators is competitive, and GNC faces competition from a variety of large diversified industrial companies and smaller generator manufacturers. However, GNC differentiates itself from competitors, as the only significant market participant focused predominantly on standby and portable generators with broad capabilities across the residential, industrial and light-commercial generator markets, broad product offerings and a diverse distribution model.

In the last six months, nine insiders have sold $21 million shares for $781 million.

Business Quality and Capital Allocation

GNC delivered a 15% organic revenue CAGR from 2000 through 2011, with a significant historical track record of higher baseline revenue from product innovation and increased awareness of products. GNC is also the fastest growing among its industrial technology peers with a five-year revenue CAGR of 13.9%. GNC also possess significant barriers to entry by virtue of its multi-channel distribution network developed over the past decade led by over 4,200 residential/commercial dealers.

GNC is a dominant home standby market leader with 70% market share of the domestic home standby market. However, at only 2.5% penetration of U.S. households, there remains significant opportunity for GNC to further grow this product category, driven by factors such an aging U.S. electrical grid and an aging population. It is estimated that every 1% of additional penetration represents an $2 billion market opportunity.

GNC is well-positioned to capitalize on the secular shift from diesel to natural gas, as the largest natural gas generator OEM in North America. Natural gas generators are gaining market share over diesel generators, as they are up to 35% less in cost than traditional diesel solutions and eliminate diesel fuel storage, spillage and spoilage issues.

GNC has a superior margin profile, with gross margins consistently in the mid to high 30% range and EBITDA margins in the low to mid-20% range. GNC is also free cash flow positive in every single year for the past four fiscal years.

GNC is diversifying its end markets by expanding its product offerings and services. The Magnum products acquisition in October 2011 added mobile products including light towers, mobile generators and mobile pumps and gave it access to new end markets such as road and commercial construction, energy and government/military; while the GenTran acquisition in February 2012 added manual transfer switches and generator accessories. As a prior leader in the power washer product category during the 1990s, GNC re-entered the market in 2011 with the launch of a broad line of residential and contractor-grade power washers. A new OneWash product was launched at the Lawn & Garden show in Louisville in October 2012.

GNC has a dividend yield of 1.27%, with a dividend payout ratio of 15%.

Conclusion

Notwithstanding the unstable demand and high leverage, GNC is attractively valued at current prices.


Disclosure

The author does not have a position in any of the stocks mentioned.


Stocks Discussed: GNC,
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