Generate Big Returns with this Top Stock

Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There never seems to be a year without disaster striking in the United States. Whether its a hurricane, a flurry of tornadoes, floods, or anything else for that matter, Americans are left stranded in their dark homes. With Americans becoming more prepared, one of the top emergency preparedness needs is a generator. If you buy a generator in North America, there is a good chance it was made by Generac (NYSE: GNRC). Generac manufactures generators for residential, commercial, industrial, and construction use, and markets them in the United States and Canada. Generac has a generator capable of powering anything from a lamp to a 20 story building. 

Generators are not only for powering homes in times of outages. Commercial businesses such as grocery stores and banks must always have backup generators to prevent loss of product. Most importantly, hospitals must have numerous backup generators to keep all of their machinery running to continue saving the lives of those inside. These generators are much larger than the ones you can wheel out of a Home Depot, and are over 100,000 times more powerful. 

Generac manufactures products that run on several different kinds of fuel. You can buy one that runs on natural gas, liquid propane, gasoline, diesel, or bio-fuels; if there is a fuel, you can probably find a generator to run on it. This is very important because gasoline supply tends to run out in areas affected by a natural disaster. Having a generator that uses a more abundant fuel is the safest bet. 

With the damage done by Hurricane Sandy, Generac is in for a huge quarter. In order for the rebuilding to happen, power must be generated to run every aspect of the reconstruction. Power can still not be restored in many areas, so Generac's generators are in high demand. If this weather were not bad enough, now we have Snowstorm Nemo blanketing the northeast. This means that on top of the area affected by Sandy, there will be an even larger number of generators needed to keep people alive.

As of Saturday, Feb. 9, there are 650,000 Americans in New England left without power. Power companies have announced that it will only take days to restore power instead of weeks, but the need for power is still there, and the only solution for the time being is a generator. Prior to the storm hitting, hardware stores increased their inventory of generators and still sold out within days. There were actually people who would buy up a few and sell them for double the cost. This is an extreme case of price gouging, but at least it shows how much people really needed them. Generac can hardly keep up with the demand, but this is a great problem for any company to have.

Cummins (NYSE: CMI) and Honda Motor (NYSE: HMC) are two competitors in the generator space. Cummins designs, manufactures, and distributes engines and engine related parts worldwide. Cummins operates in four segments: engines, power generation, components, and distribution. They operate in 190 countries, have 500 distribution facilities, and work with over 5,200 dealers. With a market capitalization of around $26.5 billion, Cummins is over $23 billion larger than Generac. This gives Cummins an advantage, because if they were to go all-in in the generator space, they could easily lower prices below Generac's. However, I think a move like this would make Generac a very intriguing takeover target. This would be a win-win for both companies. 

Honda Motor Co. designs and manufactures automobiles, motorcycles, and power products worldwide. Portable generators are one of the power products they manufacture. Honda has a much wider range of generators than Cummins, from small 1,000 watt engines that can run a fan to a 10,000 watt engine that can run a home's heating system. Honda is another company that could benefit greatly from taking over Generac, but they have shown more dedication to their automobiles than they have to the generator space. When most people think of Honda, they think of cars and lawn mowers, not generators. 

Generac is the best play on generator sales because generators are what they do. Cummins and Honda are involved in many different markets, while Generac continues to focus on the one. The reason Generac is a great investment is because of the high demand of their products right now. This would be a play on earnings for 2013 and possibly longer if disaster continues to strike. Generac is currently trading at $40.54, which is just 2.08% below its 52 week high reached days ago. They have beaten analyst expectations the last 6 consecutive quarters and should have no problem keeping the streak alive. This company is set to report 2012 fourth quarter earnings on Feb. 14. I am initiating an outperform call for Generac Holdings on CAPS and will be looking to start a long position in this stock on any weakness. I believe a pullback around $36 would be a perfect entry point. Generac Holdings is a BUY.

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JoeySolitro1 has no position in any stocks mentioned. The Motley Fool recommends Cummins. The Motley Fool owns shares of Cummins. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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