Should You Buy This Hurricane Winner Now or Later?
Palwasha is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
As Frankenstorm leaves the east coast, Bloomberg estimates economic losses from Sandy to reach $20 billion. CNN reports that over 5.3 million people are going to face long power outages, thanks to this hurricane. Millions are expected to incur losses of property, if hopefully not life, at the hands of mother nature. Yet, there are some who'll win.
Before the market closed on Friday, Wall Street was abuzz with traders loading up on potential winners of Hurricane Sandy, including home-improvement retailers and home and auto insurers. However, the most noteworthy winners were generator manufacturers Generac (NYSE: GNRC) and Briggs and Stratton (NYSE: BGG), which were up 2.91% and 2.51%, respectively. Generac saw a 24.36% gain in the past 3 months, while Briggs and Stratton witnessed a 10.25% 3-month gain. Both companies are touching their 52-week highs this week. Of the two, Generac is Wall Street's real eye-candy at the moment.
Generac, manufacturer of a range of generators and other engine-powered products for residential, commercial, and industrial use in the US and Canada, was founded in 1959 and IPO-ed in 2010. What makes Generac the more special of the two is that its generators are fueled by natural gas, in addition to liquid propane, gasoline, diesel, and Bi-Fuel.
Unlike Generac, Briggs and Stratton is an older company and has a more diversified product line of lawn-mowers and gasoline-powered engines, in addition to generators. Generac is, on the other hand, a more focused generators-only manufacturer and specializes in natural gas generators, making it a cleaner/greener company than Briggs, whose generators are mostly gasoline powered. On a commercial and industrial level, competition comes from Cummins (NYSE: CMI); however, that too specializes in diesel generators, rather than natural gas.
Beginning this month, we saw Generac shares shooting up as much as 17.9% when, on October 1st, the company raised its Q3 adjusted EPS guidance to $0.72 - $0.77. This was a result of strengthening demand in the residential sector. Generac expected net sales to be in the range of $295 - $300 million and net income between $21.5 - $25 million.
Generac reported its Q3 earnings today. Q3 EPS beat guidance at $0.78, and revenues of $300.5 million beat as well. For the full year 2012, the company upped its sales growth outlook from low-20% range to low-30% range. Adjusted EPS guidance for the complete year 2012 now hovers between $2.65 to $2.70.
Historically, ever since its IPO, the company has beaten analyst forecasts in 7 out of 8 reported quarters. In Q2 this year, EPS of $0.58 beat estimates by $0.05. Revenue of $239.1 million beat estimates by $2 million. In the preceding quarter, EPS of $0.44 beat estimates by $0.08. Revenue of $295 million beat estimates by $45 million. Looking at the company's past track record and its optimistic revised future guidance, I have no doubts believing that the company will be able to achieve results in line with the Q4 outlook.
What Lies Beyond Q3
- Looking forward, CEO Aaron Jadgfeld sees great opportunities for the company to exploit. Generac currently holds 70% of the consumer market for residential generators. More people are suffering from non-natural disaster-related power outages today than did a decade ago. Additionally, hurricanes Katrina, Irene, and now Sandy have all further heightened demand for generators. It won't be long before we hear Aaron Jadgfeld raising Q4 guidance. Sandy will undoubtedly boost Generac's Q4 sales.
- Generac is a major player in the US and Canada, and recently expanded to Australia and Latin America. 99% of the company's current revenues come from the US and Canada. The CEO sees a big opportunity for expansion in the rest of the world, especially the emerging markets, where urbanization, improving living standards of the middle class, and fast-paced industrialization have all contributed to an increase in the demand for electricity and thus power outages to meet that high demand (India is one prime example).
- Today, only an estimated 2.5% of homes in the U.S. have an installed backup generator. According to the Generac CEO, every additional 1% of household penetration represents an opportunity worth about $2 billion. That means the industry is still in its early growth phase and will take some years before it matures to reach break-even margins for industry players.
A Quick Look at the Fundamentals
|Trailing P/E||Forward P/E||Beta||ROA||ROE||Gross Margin Qtrly||Net Margin Qtrly|
|Briggs and Stratton||59.47||14.42||1.06||1.06%||2.52%||14.2%||-5.35%|
A quick look at the fundamentals in the table above illustrates that the company has a very healthy position in the industry. Its lowest trailing and forward P/Es and lowest risk (measured by beta) make it the best investment amongst its peers. Return on Assets and Equity is also the highest. Generac's quarterly gross margins are yet again the best amongst all three manufacturers. Not mentioned in the table are its Free Cash Flows, which stand at a reasonable 17.77 million and have remained pretty stable ever since its IPO in 2010. For the same period, FCF of the two peers saw very volatile fluctuations.
However, the last column of quarterly net margins isn't in line with the rest of the figures. From gross margins of as high as 36.56%, net margins fall to as low as 3.9%.
Low net margins are a result of very high interest expense. Compared to Cummins, which has a market cap of 17.8 billion, Generac has a market cap of only 1.7 billion. In terms of revenues, Generac is also comparatively a much smaller company than Cummins. However, its long term debt has hiked to as high as $895 million, while Cummins only has $736 million in long term debt. Additionally, both Briggs and Cummins have a debt to equity of only 0.37 and 0.12, respectively. A ratio of less than 1 is always attractive. However, Generac has a debt to equity of 2.2, twice as much debt as equity.
The company pays no regular dividends. It paid a $6 special dividend this year, which has been revised downward from an earlier promised $10. More than a whopping 60% of shares are held by insiders; however some insiders have lately been liquidating small portions of their stakes, taking advantage of this month's price surge.
Making the Call: Don't Jump on the Hurricane-Stock Bandwagon!
Generac may be the new hype on the street, but don't buy just yet. The stock is clearly overbought, which is why insiders have not missed this opportunity to make some grands. The company has good prospects and very attractive fundamentals, which is why I see it going a long way. Once the buzz around Sandy fades, the stock will settle back to a reasonable bargain. Management's full year average adjusted EPS estimate of $2.67 and a forward P/E of 10.49 gives the stock a fair value of $28.06. The stock last traded a little above this extrapolated fair value. You might want to set a price limit between $22-$23 for a profitable long position in GNRC. Invest wisely!
PalwashaS has no positions in the stocks mentioned above. The Motley Fool owns shares of Cummins. Motley Fool newsletter services recommend 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.If you have questions about this post or the Fool’s blog network, click here for information.