Generac Is the One to Watch Out For

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

Power outages are getting more common in US and Canada.

The energy crisis has taken over the whole world and its adverse effects are encompassing the residential and commercial sectors alike. According to the estimates of U.S. Department of Energy, power cuts cost businesses an average $80 billion loss per year. This has opened the gates for standby energy source providers in the market to take advantage of this opportunity. The use of standby power generators are growing more popular each day. Companies providing such machinery are expected to experience exponential growth on the basis of growing demand. The companies are expanding their operations outside the U.S. so that they can cater a larger market. One company working on this principle is Generac Holdings (NYSE: GNRC). Let’s see if investors can trust the company’s growth expectations or not.

Generac’s business outlook

Generac is a manufacturer and marketer of generators and other engine-powered machinery for residential, commercial and industrial markets. The company has a huge market share in the residential sector holding a 70% share of the domestic home standby market in the US. It has a huge distribution network of over 4800 dealers which acts as a competitive advantage and a barrier to entry for the new players in the market. The company’s sales rocketed up to the $1 billion mark for the first time in 2012, which was a 48% growth in sales from 2011. Along with this, the company’s 3 year average income growth stands at a huge 29.4% compared to the industry average of just 3.5%. The cash flows of the company increased from $105 in 2010 to $213 million in 2012.

Furthermore Generac is offering a greater Return on Equity and Return on Asset than the industry average as shown in the table below.Though it is performing better than the industry, the company has a lower return on equity and return on assets compared to rival Cummins (NYSE: CMI). But it may not be too worrisome for Generac, as Cummins has gone down with its revenues last year and its performance might deteriorate more in coming future due to the strict regulations recently introduced by the government on diesel engines. Briggs and Stratton (NYSE: BGG) on the other hand is a large cap stable company with little or no growth expected in near future. Thus it is unable to excite you with its margins or returns.

The company’s main focus these days is the optional standby power supply for markets, restaurants, healthcare institutions and telecom companies. This is because of the huge losses these places incur when power is cut and there is no secondary power source.  Hospitals cannot risk the life of patients by not keeping power generators. They are bound to keep power generators for emergency purposes. Moreover, the company is also considering working on a line of generators that use natural gas as the power source. This decision might be fruitful as natural gas prices have declined and demand for such products would be high.

Competitive situation

As mentioned above some of its peers are Briggs & Stratton and Cummins. Cummins gives Generac a tough time in the residential market whereas Briggs is present as a dominant force in the commercial sector. Moreover Cummins is not just confined to power generation; it has a number of other operations. Currently its diesel engine business is in a funk as the government has conducted some serious changes in the regulations for diesel engine vehicles. Cummins is currently working on Natural gas engines to take advantage from the low natural gas prices in the country.

Briggs on the other hand also has two segments i.e. engines and products. Most of its sales and profits are attributed to the engines segment whereas its product line of generators and power washers have reported losses since the past 3 years. Both these other companies have their primary focus on engines, but Generac is focused on the production of power generators only. This gives the company an advantage over its peers to increase its market share of the power generators market. Furthermore, both Cummins and Briggs provide a decent yield to their investors which Generac does not, but Generac does give out hefty special dividends to its investors. In June 2012 the company paid a $6 per share dividend which is huge compared to what you have to pay for the company’s stock. 

Recent acquisition

In the last quarter of 2012 the company made a strong move to enter international markets by acquiring Ottomotores. Through this acquisition, the company would take over the operations of Ottomotores Mexico and Ottomotores Brazil in Curitiba. This would enable Generac to combine both companies which are involved in the manufacturing and selling of diesel generators from 15 kW to 2.5 MW. Ottomotores is a leading company in Latin American standby power industry. This would help the company to strengthen its grasp on the Latin American market where its competitor Briggs & Stratton is already present.

Conclusion

Power generators are an essential component for both residential and commercial users alike. With the energy shortage in different countries increasing, the market for these power generators is growing. Growing companies like Generac can make full use of this opportunity due to its exceptional presence in the market over more than 50 years and its strong profitability and cash flows indicating that the company can take a few leaps of faith. Furthermore, its acquisition of Ottomotores will help it to focus on its sales outside the US market and take advantage of synergies.

I would recommend investors to buy Generac.


usman iftikhar has no position in any stocks mentioned. The Motley Fool recommends Cummins. The Motley Fool owns shares of Cummins and 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!

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