Generac (GNRC) , the power supply company, had become over a few short years a Wall Street darling. From the 2019 pre-pandemic levels to the 2021 top, the company gained close to 1,000%. Its burst upward was fueled by the growth trade, the home improvement trend, electric utility unreliability, and a hot new business in energy storage.
But after the run, shares cratered over 50% as interest rates spiked and the market cooled for overvalued growth stocks. How should investors view the company now? Here's my take.
Unlike some "new economy" tech growth stocks that may never recover, Generac is an innovator with strong cashflow that continues to grow. In fact, GNRS is now trading at a reasonable valuation. In a research note on Thursday, UBS Evidence Lab cited a favorable risk/reward for Generac, naming the stock its "Top Pick" in alternative energy with a $450 target.
Generac's home standby power segment saw a significant rise in sales during the pandemic. The segment propelled forward on surging investment in home improvements and disruptions to utility power transmission caused by weather and increased demand. The latter is believed to continue, as the Electric Reliability Council of Texas recently warned of power outages from record demand caused by hot weather.
Still, a post-pandemic decline is expected in HSB before starting to grow again in 2024. UBS analyst Jon Windham believes the decline is fully baked into the shares. They expect overall revenue to continue growing from the rapid expansion of Generac's Clean Energy business and Commercial & Industrial segments. "GNRC's diverse product suite, dominant market position in HSB, and existing national installer network are hard to replicate assets that in our view position GNRC as a long-term winner in the emerging U.S. smart home energy market," UBS notes.
Windham sees Generac's clean energy revenues growing from $550 million this year to $1.7 billion in 2026, over 30% compounded growth. Overall revenue is expected to grow 40% in this year, helped by strategic acquisitions and continued strong product demand. New partnerships with solar installers and integration into grid operating services at utilities are important growth drivers after introducing a host of new products in clean energy and storage.
UBS relies on its Evidence Lab Housing Intentions survey data to support Generac's HSB growth, which suggests a more permanent shift in consumer propensity to spend on home improvement projects. Half of respondents expect this increased focus to remain permanent, with around 40% of respondents planning to add a major appliance within 12 months.
Like most industrial companies, Generac is currently affected by short-term operational challenges with supply chain bottlenecks and cost inflation, which hit margins last quarter. Strong product demand and a dominant market position will allow for an offset of price increases in future quarters.
In 2000, during the Nasdaq bubble, tech companies saw a pull forward in demand, much like the recent demand spike for pandemic winners like Generac. After a retrenchment in valuations and business in the ensuing years after 2000, companies well-positioned for long-term growth with solid free cash flow and an ability to innovate emerged from the tech wreckage. Similarly, Generac will likely be a long-term winner from the broader trend toward electrification and from efforts to reduce the pains caused by more extreme weather. It will also benefit from its strategic acquisitions and innovates in clean energy and smart grid technologies.
UBS' 12-month target of $450 values GNRC at 23-times earned value to earnings before interest, taxes, depreciation, and amortization. That seems aggressive, but the company could grow into a meaningfully higher stock valuation in time. After the hefty correction, GNRC is a long-term winner and one to buy on weakness.