With a daily gain of 3% and a 3-month gain of 2.76%, Generac Holdings Inc (GNRC, Financial) has shown its resilience in the market. The company's Earnings Per Share (EPS) stands at 2.41, demonstrating a robust financial performance. But, does this mean that the stock is significantly undervalued? Let's delve into the valuation analysis of Generac Holdings to find out.
A Snapshot of Generac Holdings Inc
Generac Power Systems, operating under Generac Holdings Inc (GNRC, Financial), designs and manufactures power generation equipment for residential, commercial, and industrial markets. The company offers standby generators, portable generators, lighting, outdoor power equipment, and a suite of clean energy products. With the majority of its sales generated in the United States, the company has a market cap of $7.30 billion and sales of $4 billion.
Comparing the stock price of $116.75 per share with the GF Value of $330.13, it appears that Generac Holdings may be significantly undervalued. This estimation of fair value, also known as GF Value, paves the way for a deeper exploration of the company's intrinsic value.
Understanding the GF Value
The GF Value is an exclusive method that represents the current intrinsic value of a stock. The GF Value Line on our summary page provides an overview of the fair value that the stock should ideally be traded at. This value is calculated based on three factors:
- Historical multiples (PE Ratio, PS Ratio, PB Ratio and Price-to-Free-Cash-Flow) that the stock has traded at.
- GuruFocus adjustment factor based on the company's past returns and growth.
- Future estimates of the business performance.
We believe the GF Value Line is the fair value that the stock should be traded at. If the stock price is significantly above the GF Value Line, it is overvalued and its future return is likely to be poor. Conversely, if it is significantly below the GF Value Line, its future return will likely be higher.
Given that Generac Holdings' stock price is significantly below the GF Value Line, we believe that the stock is undervalued. As such, the long-term return of its stock is likely to be much higher than its business growth.
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Financial Strength of Generac Holdings
Investing in companies with poor financial strength carries a higher risk of permanent loss of capital. Hence, it is crucial to review the financial strength of a company before deciding whether to buy its stock. A great starting point for understanding the financial strength of a company is to look at the cash-to-debt ratio and interest coverage. Generac Holdings has a cash-to-debt ratio of 0.1, which is worse than 91.56% of 2762 companies in the Industrial Products industry. Despite this, GuruFocus ranks the overall financial strength of Generac Holdings at 6 out of 10, indicating that the financial strength of Generac Holdings is fair.
Profitability and Growth of Generac Holdings
Investing in profitable companies carries less risk, especially in companies that have demonstrated consistent profitability over the long term. A company with high profit margins typically offers better performance potential than a company with low profit margins. Generac Holdings has been profitable 10 years over the past 10 years. Over the past 12 months, the company had revenues of $4 billion and Earnings Per Share (EPS) of $2.41. Its operating margin of 8.11% is better than 57.04% of 2798 companies in the Industrial Products industry. Overall, GuruFocus ranks Generac Holdings's profitability as strong.
Growth is probably one of the most important factors in the valuation of a company. If a company's business is growing, the company usually creates value for its shareholders, especially if the growth is profitable. Conversely, if a company's revenue and earnings are declining, the value of the company will decrease. Generac Holdings's 3-year average revenue growth rate is better than 87.84% of 2665 companies in the Industrial Products industry. Generac Holdings's 3-year average EBITDA growth rate is 18.3%, which ranks better than 65.59% of 2360 companies in the Industrial Products industry.
ROIC vs WACC
Another way to look at the profitability of a company is to compare its return on invested capital (ROIC) and the weighted cost of capital (WACC). The ROIC measures how well a company generates cash flow relative to the capital it has invested in its business. The WACC is the rate that a company is expected to pay on average to all its security holders to finance its assets. We want to have the return on invested capital higher than the weighted cost of capital. For the past 12 months, Generac Holdings's return on invested capital is 6.35, and its cost of capital is 10.86.
Conclusion
In conclusion, the stock of Generac Holdings (GNRC, Financial) is believed to be significantly undervalued. The company's financial condition is fair, and its profitability is strong. Its growth ranks better than 65.59% of 2360 companies in the Industrial Products industry. To learn more about Generac Holdings stock, you can check out its 30-Year Financials here.
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