Company Overview:

Generac Holdings Inc. (NYSE: GNRC) provide energy backup systems, solar + battery storage solutions, advanced power grid software, and battery-powered tools and equipment. It caters to residential, commercial, industrial and telecommunications markets globally.

­­­­­­GNRC Details

Key Business Highlights

GNRC has a diverse portfolio with 66% of sales steams from residential, 26% from commercial & industrial application, and 8% from others. It had demonstrated a resilient model with revenue growing by 18% since its IPO in 2010.

Promising Business Model – GNRC showcased asset lite model with capex made just 2.5-3.0% of sales. Its portfolio encompasses generation and storage assets, monitoring systems, platforms & system controls, and energy management systems. The company’s products represent 65% of the total addressable market value of US$6 billion.

Robust Market Opportunity: The energy technology business is gaining traction with hydrogen fuel generators and hybrid systems with generators and solar + storage. The energy technology revenue streams are estimated to contribute US$350 million by 2024. Grid services & energy-as-a service to open new revenue streams.

Geographic Expansion: GNRC is setting up a manufacturing, assembly, and distribution facility in Trenton, South Carolina. This is expected to uplift its distribution capacity in the southern United States. It had earlier purchased a 421,000 sq ft facility at 30 Generac in February 2021, and operations began in July 2021. The new facility will add 200,000 sq ft and increase the size of the building nearly by 50%. The expansion is likely to be completed by Q3FY21.  

Spearheading Growth Through M&A: The company has been gaining scalability with 23 acquisitions since 2011. Its recent acquisition of ecobee is expected to close by Q4FY21. The Canada based company provides home monitoring products with over 2 million customers in North America. The deal is expected to bring synergies in the home energy ecosystem. The transaction is valued at US$770 million, with US$200 million in cash will be paid upfront.

Historical Financial Trend:

Through a series of acquisitions, the company achieved revenue synergies with numerous cross-selling opportunities and geographic expansion. The acquisitions also favourably cut out various costs with strategic sourcing and lean cost culture. With strong traction in the residential segment and asset lite model, GNRC raked consistent free cash flows. It is targeting to achieve 1-2x leverage. The company had long-tenured debt facilities – its term loan matures in 2026. It had about US$250 million remaining under its share buyback plan.

Figure 1: Adjusted EBITDA and Free Cash Flow Trend:

Source: Company Reports, Analysis by Kalkine Group

Third Quarter FY21 Performance:

The residential segment benefited from a strong pull in home standby generators and PWRcell energy storage systems. Acquisitions favorably contributed about 1% of total revenues in Q3FY21. Its international sales witnessed 61% growth attributed to strong demand in Europe and Latin America.  The company posted an adjusted EBITDA of US$209 million, an increase of 14.35% over the prior year. Price impacts at domestic sales and higher volume growth at international segment positively affected the EBITDA growth.

Figure 2: Quarterly Revenue Trend:

Source: Company Reports, Analysis by Kalkine Group

Top 10 Shareholders:

The top 10 shareholders together form ~35.62% of the total shareholding. The Vanguard Group, Inc.  and BlackRock Institutional Trust Company, N.A. hold a maximum stake in the company at ~10.52% and ~5.72%, respectively.

Figure 3: Top 10 Shareholders

Source: Analysis by Kalkine Group

Key Metrics:

The company had high debt levels with a debt-to-equity ratio of 0.51x as of September 30, 2021, higher than the industry median of 0.30x. Due to stable profitability, it had an ROE of 7.7% in Q3FY21, higher than the industry median of 3.0%. The company’s current ratio is upward trending, and cash cycle days slightly improved over the prior year.

Figure 4: Key Financial Metrics

Source: Analysis by Kalkine Group

Outlook:

With a decent pipeline of opportunities and benefits of the acquisition, GNRC has maintained its full-year revenue growth target of 47-50% for FY21. Owing to the incremental rise in material costs on the back of supply chain concerns and increase in logistics costs, its net margin is now expected to be 15.0% for FY21. This is compared to the prior expectation of 15-16%. Correspondingly, its adjusted EBITDA margin is revised downwards from earlier 24.5-25.0% to 23.5%.

Key Risks:

GNRC’s earnings are exposed to volatile foreign exchange movement with customers scattered across the globe. The pandemic and lockdown fears may inflate distribution and logistics costs which may impact profits invariably. Heightened competition from solar PV manufacturers with embedded energy storage systems may drain volume offtake.

Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

Stock Recommendation:

GNRC has delivered 3-months and 6-months months returns of ~6.01% and ~41.64%, respectively. The stock is trading above the average of the 52-week high price of US$524.31 and the 52-week low price of US$202.56. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in % terms). The company might trade at a slight premium compared to its peers’ average EV/Sales (NTM trading multiple), considering the diversified portfolio and stable cash flows. For valuation, few peers like Enphase Energy Inc. (NASDAQ: ENPH), EnerSys (NYSE: ENS), Shoals Technologies Group Inc. (NASDAQ: SHLS), others have been considered. Considering the growth focus in the energy technology business, intention to ramp up international expansion, consistent cash flow generation, current trading levels, potential upside as indicated by the valuation and key business risks, we give a “Buy” recommendation on the stock at the closing price of US$439.99, up by ~1.32%, as of 22 November 2021.

GNRC Daily Technical Chart (Source: REFINITIV)

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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