- The aging power grid will need more generator systems for the home electrification trend.
- Home standby power customer demand is strong, but qualified installers are in short supply.
- Generac has solar power storage options, has taken a piece of WATT Fuel Cell Corp, and acquired IoT platform Blue Pillar.
- Shares trade at 11X forward earnings with an 8.64% short interest.
Power generation and energy storage systems maker Generac Holdings (NYSE:GNRC) stock has been a heartbreaker. Shares were trading at a high of $524.31 just over a year ago before shares fell to a new weekly lower low of $86.29 in late December, below its pre-pandemic levels.
With a rare bomb cyclone storm affecting 200 million people in the country, the fear of losing power could be a driver for shares to bounce. Known for manufacturing power generation systems for residential and commercial markets, its products are relatively unappreciated until the power goes out. It owns a 60% share in the telecom backup generation space and competes with heavy equipment and generator manufacturers Caterpillar (NYSE:CAT) and Cummins (NYSE:CMI).
Aging Power Grids
Just like fire extinguishers are largely ignored until a fire breaks out. Aging power grids have become more vulnerable to high-impact weather-related events, from hurricanes to ice storms and polar vortexes. Global decarbonization efforts have also introduced the clean and renewable energy megatrend combined with home electrification to be a robust future growth driver. It hopes to join the likes of clean energy aggregators like Enphase Energy (NASDAQ:ENPH) and SolarEdge Technologies Inc (NASDAQ:SEDG), participating in the Grid 2.0 megatrend.
Install and Activation Constraints Capping Growth
The Company has suffered from a labor shortage of qualified installers to install and activate their home standby generators. Generac CEO Aaron Jagdfeld specified that despite strong end customer demand for home standby generators, the install capacity lagged production output.
He noted, "The ability to install contractors to fully service the demand for backup power from homeowners continues to be constrained by labor availability, permitting in utility-related delays, and shortages in certain materials needed to complete an installation."
Installer Remedies
They are trying to remedy these problems by providing resources for existing dealers to expand labor forces and additional installation training for non-dealer contractors. As a result, its dealer network has grown 40% from pre-pandemic levels from 6,200 to 8,500.
He stated, "We are working to streamline home standby projects by creating universal permitting packages and replicating past successes in simplifying approval processes from certain local utilities." They are also intensifying efforts to expand their overall dealer count and have shorter production times.
Ugly Duckling
GNRC has been in a slow decline since peaking at $281.50 in August, with barely any weekly market structure low (MSL) buy triggers, as nearly every successive week resulted in a lower low. There was a higher body low for a weekly MSL trigger on a breakout above $104.54, assuming the body close stays above $91.95.
A body close under will mean a lower low, and the candle count resumes until a higher low is made. The weekly 20-period exponential moving average (EMA) continues to fall at $143.75, followed by the 50-period MA at $219.75. To show how oversold the stock has been, the weekly stochastic fell under the 20-band oversold level in August and has since been smothered under the 20-band for over four months straight.
The candlestick bodies have been getting smaller, indicating smaller ranges that can help solidify a base. Pullback supports are $90.30, $84.86, $75.50, $69.02 and $60.69.
Profit Generator
On Nov. 2, 2022, Generac released its fiscal Q3 2022 results for the quarter ending in September 2022. The Company reported an earnings per share (EPS) profit of $1.75, excluding non-recurring items, beating consensus analyst estimates for a profit of $1.64 by $0.11. In addition, revenues grew 15.4% year-over-year (YoY) to $1.09 billion, matching consensus analyst estimates.
Residential sales rose 9% to $644 million. Commercial & Industrial product sales rose 20% to $311 million. In addition, the Company acquired an industrial internet of things (IoT) platform developer Blue Pillar which develops software solutions to enable distributed energy generation monitoring and control.
Falling Short
Generac CEO Aaron Jagdfeld admitted the net sales fell short of its prior expectations. He commented, "Commercial & Industrial product sales continued to experience strong growth during the quarter, but Residential product sales began to slow as installation capacity constraints in our distribution network led to higher field inventory levels for home standby generators.
This has resulted in lower orders than expected from our channel partners even as we've seen sequential improvements in several key metrics for the home standby category."
He noted that the loss of a large clean energy product customer negatively impacted shipments of clean energy products. Home standby order headwinds are expected to persist through the first half of 2023; secular growth and clean energy megatrends support it's 'Powering a Smart World' enterprise strategy.
In-Line Guidance
Generac gave in-line revenue guidance for fiscal full-year 2022 in the range of $4.56 billion to $4.63 billion versus $4.59 billion consensus analyst estimates. The Company expects a net income margin between 9% to 10% for the year. This includes the $55.3 million pre-tax charge in Q3. In addition, the Company took a minority stake in WATT Fuel Cell Corp. They generate power without combustion and low emissions through an electrochemical process that derives hydrogen molecules from readily available sources like propane, hydrogen, and gas.
Analysts Reactions
Guggenheim maintained a Buy rating on the shares but lowered its price target to $120 from $180 on Dec. 21, 2022. Before that. Robert Baird downgraded shares to Neutral, dropping its price target to $119 from $122. Stifel transferred coverage at a Hold rating with a $98 price target based on 9X its 2023 EBITDA forecast.