Should You Buy This Rainy Day Stock Before Earnings?
AnnaLisa is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The sounds of a ripping good storm are music to the ears of Generac Holdings (NYSE: GNRC) shareholders. The power generator company has been reaching out to businesses with its free risk assessment program and scaring them silly with statistics on money lost per day without power, $125,000 for a retail store, $25,000 for a convenience store or gas station, $15,000 for a restaurant, $10,000 for a fast-food restaurant, and $10,000 a day for a small office based business.
For example, New York, the hub for business, has a very high risk of outages at 76.9 hours without power annually compared to California with a low risk of 15.8 hours. Interesting, but what does it mean for the stock ?
Underserved market opportunity
The company has been making generators for business more affordable, offering rentals of mobile generators for businesses with multiple locations with pre-wired switches for immediate hookup, as well as its in-place automatic generators which power up within minutes (especially crucial for businesses which need power for constant computer use.)
At the KeyBanc Capital Markets Industrial, Investor Presentation on May 30 the company noted one of their main opportunities is an underserved "optional" standby power market. This includes businesses like grocers, restaurants, healthcare, and telecoms.
Just hours ago my local grocer experienced a power outage due to a fire at the neighboring fast-food eatery. Thousands of dollars worth of meat and seafood had to be moved, not to mention the cost of lost sales. It's not always weather that causes an outage.
What analysts want to hear
Generac is once again at 52-week highs and the mid-cap name will be reporting Q2 earnings on July 30.
With 60% of sales already from residential and 70% market share for North American residential standby generators, these commercial and industrial opportunities are going to be something analysts will expect to hear about. They will also be sure to ask how goes the company's courtship with homebuilders to install permanent generators as well as progress on retrofitting existing homes.
With their residential/commercial dealers are clustered from Canada to Florida from the East Coast westward through Tornado Alley analysts will want to know how well this free risk assessment sales initiative is working.
The company just entered the power washer market in 2012, and progress will be of interest as well as on the company's largest new product rollout ever. Generac is seeking to leverage the cheaper cost of natural gas as a power source for its generators and advertising to potential commercial and industrial clients the 35% cost savings with natural gas generators. Are businesses buying this pitch?
Analysts will also query about the success of the company's first national advertising campaign and how goes the integration of its latest acquisition Ottomores, a Latin American leader in standby power generation with facilities in Brazil and Mexico City, for $45 million in cash on hand.
Brazil will be key because its main competitor in commercial and industrial, Briggs & Stratton (NYSE: BGG) is strong in Brazil, and this was a lone bright spot for Briggs & Stratton's Q3 earnings. Briggs & Stratton operates in 100 countries on six continents. It also has a backup income stream from its outdoor power equipment, snow blowers, and lawn care equipment. That's a good thing for them as Briggs & Stratton's generators have only been generating losses.
With Generac announcing international expansion ambitions into Australia, Russia, the Ukraine, New Zealand, and Asia expect questions as to when and where these moves might happen. And does the company need more acquisitions to compete in these new markets. Generac also bought Magnum Products (light towers, mobile generators and pumps) and Gen-Tran (manual transfer switches and accessories).
Analysts will question the decline in free cash flow as a percentage of adjusted net income from 97% in 2012 to 88% in 2013. Is it really strong enough to service debt as the company maintains? Interest expense on that debt has doubled from $23.7 million in 2011 to $49 million in 2012.
The company guided earlier this year that gross margin would stay flat at 37%. Analysts will want to see that improve or know the reason why.
Can they clear the bar?
Generac's results keep analysts raising the bar as Q1 sales were up 36% and EPS up 26% from the year ago quarter. These results helped the stock surge 82% over the last year as has interest in residential generators after Hurricane Sandy. The company has enjoyed a 47% EPS growth rate over the last five years but analysts have predicted the company maturing into a 10.33% growth rate.
It is currently trading at a 25 trailing P/E with a forward P/E of 11.91. Last summer the P/E was at 5.11 and the market cap at only $1.79 billion. Add on last year's Generac special dividend of $6.00 and this year's of $5.00 and your return would be much better than at Briggs & Stratton.
Briggs & Stratton's trailing P/E is 85.65 and its yield is 2.20% and the shares are up 31% over the last year. Its PEG at 2.62 is higher than Generac's 1.15. Short interest is higher at 17.80%.
Generac's largest rival at ten times the market cap is Cummins (NYSE: CMI), the huge diversified industrial machinery company. They compete for share as every 1% increase in market penetration is a $2 billion residential opportunity. Cummins has a 15.17 trailing P/E and a 2.10% yield but its PEG at 1.55 is higher than Generac's. Cummins has many more moving parts and is not a pure play on the powerful generator (pun intended) market. The stock has run 35% this last year.
Buy before or after earnings
I think one can establish a small position in Generac before earnings. Hope for any pullback as excitement fades after earnings. The company has reliably delivered, and although you just missed this year's special dividend this company has a very bright future ahead. It's a stock you want to hold through fair and foul weather.
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AnnaLisa Kraft has no position in any stocks mentioned. The Motley Fool owns shares of Generac Holdings. 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!