anyone have thoughts on Generac (gnrc)? It fell off a cliff post-COVID but last quarter didn’t strike me as too bad.
Personally, don't know much about GNRC, but here is Morningstar's take:
Generac Earnings: Shares Rise on Normalizing Home Generator Field Inventories
Analyst Note | Updated May 03, 2023
We maintain our $124 fair value estimate for narrow-moat Generac following the company's first-quarter results. Shares rose sharply (up 15% at the time of writing) on results, which we equate to low expectations. We make only minor changes to our model and view shares as fairly valued following the jump.
Generac's 2023 can be divided into two halves: the first half is expected to be weak as the company works through elevated levels of channel inventory for its home standby generators, while the second half should return to more normalized results. First-quarter results were particularly weak, with revenue for the company's residential products dropping 46% year on year, consistent with expectations. The most important takeaway to us from results was that field inventories continue to normalize. Days of field inventories fell to 1.4-1.5 times normal, down from 1.7 times normal in fourth-quarter 2022 and 2 times normal in third-quarter 2022. The company expects field inventories to approach normal around midyear, which should support stronger results in the second half.
Generac continues to focus on expanding its clean energy capabilities across both residential and commercial/industrial end markets. Within its residential activities, 2023 is expected to be a reset year for its solar and storage portfolio with a focus on building distribution capabilities and correcting prior reliability problems. Clean energy remains an area of interest for additional acquisitions.
Longer term, we reiterate our view that Generac's generators will face increased competition from new technologies, such as battery storage. Management's strategy to date has been to turn this threat into an opportunity via acquiring businesses in these areas. However, we view this strategy with cautious optimism and see risk that such investments don't turn out as planned.
Business Strategy and Outlook | Updated Feb 15, 2023
Generac is in the midst of a transition to an energy technology solution company.
The company’s legacy business is focused on home and commercial/industrial generators using internal combustion engine technology. Here, the company is most focused on continuing its leadership in home standby generators, leading with natural gas-fueled engines, and expanding the connectivity of its generators. We attribute its past success in home standbys to its substantial sales and marketing efforts, which have helped increase awareness for the niche category.
Increasingly, profits from its legacy generator business will be deployed into clean energy and digital capabilities. We think this strategy makes sense and aligns with our macro view for an increasingly decarbonized, decentralized, and digitized electric system. The company is rapidly expanding its residential solar and energy storage business within the United States following acquisitions in recent years.
While solar and storage represent a large and growing addressable market, success is not assured. Existing competitors serving the U.S. solar inverter market control approximately 90% of the market, which could make it difficult for a new entrant such as Generac to gain traction. In addition, recent execution hiccups within this business segment have delayed reaching management's targets.
Management has largely used acquisitions to quicken its entrance into new markets in the past, and we expect the company to continue to be acquisitive.
Fair Value and Profit Drivers | Updated Feb 15, 2023
Our fair value estimate for Generac is $124 per share. We model a five-year forecast with an implied terminal enterprise value/EBITDA multiple of 9.5 times.
In Generac’s legacy generator businesses, we view its home standby segment as its most profitable and valuable. The company has seen a sharp increase in sales in recent years due to elevated power outages. We forecast sales peaked in 2022 followed by a plateau long-term. We expect Generac’s legacy commercial and industrial business to continue its rebound from COVID-19-related weakness in 2020 and clean energy acquisitions to support continued growth in the medium term.
We believe the company’s growth in clean energy will increasingly be a profit and value driver in the years to come, although clean energy was less than 10% of 2022 sales. We forecast rapid growth in this segment but don’t expect it to unseat incumbents, such as Enphase or SolarEdge. We expect gross margins for this product segment to remain below its home standby generator margins.
While we do not explicitly forecast grid services revenue at this time, we think this represents a long-term opportunity for Generac. As the company provides more disclosure around the business model and potential revenue opportunities, we would look to incorporate this into our valuation.
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