The stock of Generac Holdings (NYSE:GNRC, 30-year Financials) gives every indication of being significantly overvalued, according to GuruFocus Value calculation. GuruFocus Value is GuruFocus' estimate of the fair value at which the stock should be traded. It is calculated based on the historical multiples that the stock has traded at, the past business growth and analyst estimates of future business performance. If the price of a stock is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. On the other hand, if it is significantly below the GF Value Line, its future return will likely be higher. At its current price of $327.38 per share and the market cap of $20.6 billion, Generac Holdings stock appears to be significantly overvalued. GF Value for Generac Holdings is shown in the chart below.
Because Generac Holdings is significantly overvalued, the long-term return of its stock is likely to be much lower than its future business growth, which averaged 13.3% over the past three years and is estimated to grow 18.76% annually over the next three to five years.
Link: These companies may deliever higher future returns at reduced risk.
Investing in companies with poor financial strength has a higher risk of permanent loss of capital. Thus, it is important to carefully review the financial strength of a company before deciding whether to buy its stock. Looking at the cash-to-debt ratio and interest coverage is a great starting point for understanding the financial strength of a company. Generac Holdings has a cash-to-debt ratio of 0.72, which is in the middle range of the companies in Industrial Products industry. GuruFocus ranks the overall financial strength of Generac Holdings at 6 out of 10, which indicates that the financial strength of Generac Holdings is fair. This is the debt and cash of Generac Holdings over the past years:
Companies that have been consistently profitable over the long term offer less risk for investors who may want to purchase shares. Higher profit margins usually dictate a better investment compared to a company with lower profit margins. Generac Holdings has been profitable 10 over the past 10 years. Over the past twelve months, the company had a revenue of $2.8 billion and earnings of $7.14 a share. Its operating margin is 21.49%, which ranks better than 93% of the companies in Industrial Products industry. Overall, the profitability of Generac Holdings is ranked 9 out of 10, which indicates strong profitability. This is the revenue and net income of Generac Holdings over the past years:
One of the most important factors in the valuation of a company is growth. Long-term stock performance is closely correlated with growth according to GuruFocus research. Companies that grow faster create more value for shareholders, especially if that growth is profitable. The average annual revenue growth of Generac Holdings is 13.3%, which ranks better than 81% of the companies in Industrial Products industry. The 3-year average EBITDA growth is 21.8%, which ranks better than 79% of the companies in Industrial Products industry.
Another way to evaluate a company's profitability is to compare its return on invested capital (ROIC) to its weighted cost of capital (WACC). Return on invested capital (ROIC) measures how well a company generates cash flow relative to the capital it has invested in its business. The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. If the ROIC is higher than the WACC, it indicates that the company is creating value for shareholders. Over the past 12 months, Generac Holdings's ROIC was 24.25, while its WACC came in at 6.72. The historical ROIC vs WACC comparison of Generac Holdings is shown below:
To conclude, The stock of Generac Holdings (NYSE:GNRC, 30-year Financials) shows every sign of being significantly overvalued. The company's financial condition is fair and its profitability is strong. Its growth ranks better than 79% of the companies in Industrial Products industry. To learn more about Generac Holdings stock, you can check out its 30-year Financials here.
To find out the high quality companies that may deliever above average returns, please check out GuruFocus High Quality Low Capex Screener.
