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Why This Stock Wants to Help You Keep The Lights On

In the early 1990s, one in 10 U.S. households installed security alarms; now the ratio has almost doubled. Standby generators are now what security alarms used to be two decades ago, but that could change soon. Generac (NYSE: GNRC  ) is a leading designer and manufacturer of a wide range of generators and other engine-powered products, and it's the market leader in the U.S. residential standby generator market. It should benefit from consumers' increasing awareness of these devices' importance.

Buying a little insurance won't hurt
Hurricane Sandy, which left 8.2 million people without power for as long as two weeks, was a wake-up call for many Americans. While about one-fifth of American households have installed security alarms, less than 5% have automatic standby generators in case the power goes out.

A generator's four- or five-figure price tag (depending on power capacity) is certainly not a huge expense to insure yourself and your family against power outages. Furthermore, about three in four buyers are aged 50 and above, suggesting that the younger population will be a key area of customer growth in the future.

Generac estimates that every 1% increase in market penetration represents an additional $2 billion worth of market opportunity. As the dominant market leader with about 70% market share, Generac is well-positioned to capitalize on future growth.

The better mouse trap
To grab that potential growth, Generac has set itself apart from its standby-generator competitors via its diverse multichannel distribution model. It works with national retailers, wholesalers, private-label relationships, and e-commerce websites to get its products in front of consumers. In addition, the size of Generac's network of more than 5,200 dealers is unmatched by that of its competitors.

In addition to its strong distribution network, Generac also has an edge over peers like Briggs & Stratton (NYSE: BGG  ) , in terms of its product offerings.

The breadth of product offerings is also a key factor in the purchasing decision, given that consumers choose standby generators of different configurations and capacities to suit their needs. Briggs & Stratton has a limited selection of power generators with capacities below 60 kW; while Generac boasts a broad product line with multiple configurations and power capacities up to 150kW, which can power an entire house without interruption.  

Also, since generators are placed outdoors, the quality of their enclosures matters a lot. Briggs & Stratton and its peers typically provide a standard painted steel enclosure to protect against weather. In comparison, Generac goes a step further with its proprietary RhinoCoat paint finish on its enclosures, which provides superior corrosion protection.

After-sales service is equally important. In addition to the standard three- to five-year sales warranty provided by competitor Briggs & Stratton, Generac's products come with Good Housekeeping magazine's seal of approval. The magazine promises to refund or replace defective products bearing that seal within two years of purchase.

These small differences all add up to help Generac deliver superior products to its customers.

Expanding beyond North America
Although the North American standby generator market opportunity is large, both Generac and its peer Cummins (NYSE: CMI  ) are exploring overseas growth opportunities.

Cummins is a diversified industrial company, with power generation only accounting for 10% of its sales. However, within its power generation business segment, Cummins is outpacing Generac in terms of its overseas expansion.

Cummins generates 65% of its sales from power generation outside U.S. and Canada, while North America still accounts for slightly less than 90% of Generac's revenues. In this aspect, Cummins has the edge when it comes to leveraging the strong demand for power in regions such as Africa, Middle East, where people have limited access to electric infrastructure.

But Generac is also ramping up on its international expansion efforts via mergers and acquisitions. In December 2012, it completed the acquisition of Ottomotores, a manufacturer of power generation equipment in Mexico and Latin America, which also exports its products to the Middle East and Africa. Ottomotores should acts as a springboard for Generac's future efforts to expand its distribution channels and develop market-specific products.

While some of Generac's peers may have a more attractive international footprint, my bet is on Generac for its leadership in the U.S. residential standby generator market. With all three companies similarly valued at 13-14 times forward P/E, Generac stands out for its distribution scale and superior product offerings.

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Related Tickers

9/30/2016 4:02 PM
GNRC $36.30 Up +0.81 +2.28%
Generac Holdings CAPS Rating: ***
BGG $18.65 Up +0.20 +1.08%
Briggs and Stratto… CAPS Rating: ***
CMI $128.15 Up +3.89 +3.13%
Cummins CAPS Rating: *****