Generac Earnings: Shares Drop on Reduced Guidance, Elevated Investor Expectations

We lower our fair value estimate for narrow-moat Generac GNRC to $110 per share from $124 following the company’s second-quarter results. The drivers of our reduced valuation are a reduction to our revenue expectations and lower operating margins. We view shares as fairly valued following the share price drop.

Generac updated its 2023 sales expectations to a decline of 10%-12% from a prior expectation of a 6%-10% decline. The primary driver is weakness for the company’s residential products, namely home generators and clean energy. This was partially offset by continued outperformance by the company’s commercial and industrial segment, but we view this as less of a long-term valuation driver. The company blamed the macroeconomic environment for lower than expected close rates for home generators in the quarter, which resulted in field inventories remaining elevated, ending at 1.2-1.3 times normal levels versus prior expectation for a return to normal levels.

We view the sharp share price reaction (down 24% on the day) as a result of the reduced guidance and increasing investor expectations in recent weeks following summer heat waves stressing power grids. Shares appear fairly valued following the reset, with high-profile power-outage events continuing to represent the biggest upside driver, in our view.

While investors remain laser focused on home generator inventories and order trends, we see prudent capital allocation as a key driver of shares over the longer term. The company faces the decision of how to allocate cash from its cash-cow home-generator business over the coming years. Thus far, the company remains committed to funneling cash to its upstart clean energy activities. We view this strategy with cautious optimism and see risk that such investments don’t turn out as planned. We expect Generac’s ongoing transition to an energy technology company to be a core focus of its upcoming investor day in late September.