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Coverage Initiation: Generac
Value Line has initiated coverage of Generac Holdings Inc. (GNRC) in its flagship product, The Value Line Investment Survey. The company, founded in 1959, designs and manufactures generators and other engine-powered products (such as power washers) that are sold to residential, commercial, industrial, and construction customers under the Generac and Magnum names through a network of dealers, retailers, wholesalers, and equipment rental companies. Generac, with about 2,200 employees (as of year-end 2011), is based in Wisconsin and has five manufacturing facilities and a dealer training center there. The company’s initial public offering on the New York Stock Exchange occurred in February of 2010.
As the name suggests, Generac is best known for manufacturing generators serving customers of many sizes. The use of generators for homes or businesses received a lot of publicity this fall when Hurricane Sandy caused outages for more than eight million electric customers. Generators that are powered by natural gas, rather than diesel fuel, are still in the minority, but their market share is growing. Generac has more than 4,500 residential and commercial dealers and about 90 industrial dealers.
The company has various avenues for growth. Currently, residential penetration of standby generators is just 2.5%. With so much room for expanding this market, management is using a proprietary system to target the most likely buyers. On the industrial and commercial side, Generac is trying to capitalize on the secular shift from diesel to gas-powered generators, and is focusing on key engineering firms and electrical contractors.
Another way for Generac to grow is through expansion of its product offerings. The company acquired Magnum Products in 2011 and GenTran in 2012. Generac is also going beyond generators, and is focusing on things such as power washers. Management has developed a product that it believes can handle numerous tasks and reduce customer dissatisfaction. The company will launch this in the first quarter of 2013.
Geographic expansion is another corporate objective. Generac is interested in Central and South America, the Middle East, Eastern Europe, and Asia. This is a nascent effort; in 2011, just 1% of the company’s shipments were outside of North America. To this end, Generac acquired Ottomotores, a generator manufacturer in Latin America, in December of 2012.
Investors should be aware of some risk factors. Naturally, the state of the economy is one. The last time the economy was in recession, this stock wasn’t trading publicly, so it has no performance record in a bad economy. The weather is another risk factor. Long periods without sustained power outages lessen the demand for home standby generators. The company is highly leveraged, with long-term debt making up 67% of total capitalization as of September 30, 2012. Income-oriented investors should be aware that Generac does not pay regular dividends, although it paid a special dividend of $6.00 a share in June of 2012 as part of a recapitalization. Finally, the stock has exhibited a lot of volatility in its brief trading history.
For a more thorough look at Generac’s business prospects, and the particular investment merits of its stock, subscribers should examine our full report in The Value Line Investment Survey.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.