Generac Holdings (NYSE: GNRC) - American manufacturer of generators. The company has a stable business with good market conditions. But the stock looks overbought, And, it seems to me, all the positive is already included in the current price.
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What do they earn
Generac manufactures and sells home appliances: pumps, Generators, high pressure washers, switches and other household appliances. A detailed list and description can be found on the company's website.. The company provides solutions for both the consumer sector, and for professional industrial.
According to the company's annual report, by type of purpose, the company's equipment is divided as follows:
- Consumer Sector — 62,6%.
- Industrial sector and commerce — 28,3%.
- Other — 9,1%. This includes such services, how to sell spare parts, project management, remote monitoring services, warranty extension and so on.
By region, the company's revenue is divided as follows:
- USA - 84,04%. Adjusted EBITDA margin of the regional segment — 26,97% from its proceeds.
- Overseas sales in unnamed countries - 15,96%. Adjusted EBITDA margin of the regional segment — 5,14% from its proceeds.
Arguments in favor of the company
There is room to grow. In the US, the company occupies approximately 70% market, yet only 3-5% of American households own a generator. The company has defined its target audience quite well.: it's older people 60 years with an annual household income of about 130 thousand dollars per year. Frankly speaking,, These are people of retirement age and in a good financial position. Most older people move to live in the States on the coast, How do you know from the news, these places are often struck by natural disasters, cutting out electricity. And sometimes regional apocalypses happen there., how it was in Texas last winter.
Considering, that the pandemic spurred an exodus of boomers — the wealthiest generation in the US today — into retirement, i would expect, that Generac products will be in demand for another 5-10 years or even more.
Season. According to the annual report, from 27 to 31% the company's sales usually fall in the fourth quarter, when U.S. weather causes power outages and natural disasters occur. So there is a possibility of growth in the company's financial performance during the current quarter..
Can buy. Given the profitability of the company, as well as a positive environment for its business, it may well be bought by some large holding. In absolute terms, Generac is worth a lot - capitalization is $ 27.759 billion. Think, taking into account all the positive aspects, Generac can be bought with a good premium to the current price.
The level of well-being of generations in the United States in 2019 year
| Welfare, trillion dollars | Number of people, million people | Welfare per person | |
|---|---|---|---|
| The Silent Generation | 18,8 | 23,0 | 817 391 $ |
| Boomers | 59,4 | 71,2 | 834 270 $ |
| Generation X | 28,6 | 65,0 | 440 000 $ |
| Millennials | 5,0 | 72,6 | 68 871 $ |
What assets do different generations of Americans own?
| 70+ | 55—69 | 40—54 | ⩽ 39 | |
|---|---|---|---|---|
| The property | 21,6% | 20,5% | 27,6% | 37,9% |
| Durable Consumer Goods | 3,8% | 3,6% | 5,2% | 9,4% |
| Shares and mutual funds | 24,6% | 23,1% | 18,6% | 8,1% |
| Pension accruals | 16,3% | 25,0% | 21,9% | 21,0% |
| Private business | 7,9% | 9,7% | 12,1% | 8,1% |
| Other assets | 25,8% | 18,1% | 14,7% | 15,5% |
What can get in the way
We need to think about it. Company P / E 53,44, P / S 8,11, it does not pay dividends - and at the same time, its shares have grown more than four times in a year and a half. But revenue and profit didn't increase that much. Strictly speaking, the company looks expensive and overbought by any standard, despite the positive conjuncture.
I get the impression, that investors gave the company too much credit of trust - and it has nowhere to grow further. But there is where to fall.
The company recently released a pretty decent third quarter report., but it turned out to be worse than analysts' expectations, and stocks fell by as much as 10%. All because of problems with logistics and rising costs, what all industrial enterprises face now. And you know what - these problems have not gone away yet, which means, at least one next Generac report may be worse than expected. So,, stocks may still fall. Or just not grow up - they are already quite expensive.
Also, the inflated price tag of Generac may negatively affect the prospects for the purchase of the company by someone larger.. Or the proposed premium to the existing price will not be so big, how generac's current shareholders would like.
What about dividends? Introduce, what the company decides to spend more 80% from the company's profit on dividend payments. With the most optimistic option, it will turn out 7 $ per share per year. Then with the current stock price in 439 $ dividend yield will be 1,59% per annum. This, certainly, better 1,25% annual average for S&P 500, but I doubt, that such dividends will catch up with fans of passive returns, the inflow of which will pump up quotes even more. AND, certainly, I doubt, that the payments will be so generous, like in my abstract example. Probably, if they appear at all, they will be scanty.
ESG everywhere. The company has clean energy solutions, but they do not give such a significant percentage of sales in order to, for the company to shout about it on every corner. So I wouldn't have much hope, that the ESG lobby will pump up Generac quotes. By the way,, in the Sustainalytics ESG ranking, the company is in 130th place in its subgroup, and the level of ESG risks is listed as “very high”.
So that, maybe, we should be concerned about possible distrust of these stocks from ESG investors. Generac does not comment on this., that is, Nothing to be proud of. After all, now even “dirty” businesses like Covestro are trying unsuccessfully to go on the topic of ESG, inflating their achievements in this area, even if there is nothing special to inflate.
What's the bottom line?
Generac is a company with good business growth potential. But it costs too much, and so far I don't see any reasonable reasons here for a further increase in quotes.
Although I may be wrong: the company can continue to grow further through the speculative exploitation of clean energy, and if she has significant achievements on this front, it will be possible to hope for an influx of ESG investors. Growth resource at the expense of ordinary investors, it seems to me, here is already almost exhausted - although you can take a chance and take these shares, To view, what will come out. But personally, I would try to catch them in the region of 200-250 $ per rebound.
