Nothing builds demand for a product more than seeing it in action, and Generac Holdings (GNRC 3.84%) benefited greatly during the summer months from weather events that put its power generators to use. After relatively calm periods during which would-be customers were lulled into thinking that they might not need the company's products, Generac had already gone through tough times from a financial perspective. Coming into Wednesday's third-quarter financial report, Generac investors weren't sure how much progress the company would have made toward getting back on a growth trajectory, and although earnings fell from year-ago levels, stronger sales and a better-than-expected bottom line were enough to drive some optimism from the company looking forward. Let's take a closer look at the latest from Generac Holdings and what it says about the company's future.
Generac powers up
Generac's third-quarter results were stronger than most had expected. Sales were up almost 4% to $373.1 million, easily topping consensus projections for top-line growth of just 1%. Adjusted net income did fall 16% to $53.2 million, but the resulting adjusted earnings of $0.82 per share were $0.05 higher than what most investors were looking to see from the generator maker.
Looking more closely at Generac's numbers, results across the company were relatively consistent. The key residential products division boosted its sales by more than 4%, with the unit seeing the most direct impact from the more favorable weather environment. Commercial and industrial products managed to eke out a 1% gain, but as we've seen in past quarters, the reduced demand for mobile products in the oil and gas industries played a key role in holding back sales gains. The other products category showed the biggest sales growth of all, rising 17% from year-ago levels.
Perhaps the best sign of where Generac is going came from looking at its geographical breakdown. Domestic sales were down 10%, but internationally, Generac saw sales nearly triple. The acquisition of Italian generator manufacturer Pramac was responsible for most of the gains, and although the buyout had a temporary negative impact on operating margin, Generac is confident that the move will pay big dividends down the road.
CEO Aaron Jagdfeld again put Generac's numbers into the proper context. "Despite a challenging power outage environment over the last few years," Jagdfeld said, "our market position for residential products remains strong, retail placement is currently at all-time highs, and the number of active dealers has returned back to peak levels." Moreover, the CEO sees greater power-outage activity as a way for the company's sales force to implement new marketing programs to boost revenue in the future.
Can Generac reach full power?
Generac expects to remain on the cutting edge of innovation in order to maximize its future opportunities. As Jagdfeld said, "We continue to make strategic investments in new products, technologies, and infrastructure across the business to support the next leg of growth that we believe will occur as [our] end markets eventually recover."
Generac also boosted its guidance for 2016, expecting a ramp-up in demand for residential products throughout the remainder of the year. Net sales will rise between 9% and 10% for the full year according to Generac, up from previous guidance for 6% to 8% growth. Organic sales declines of 8% to 9% look painful, but they'll still be less than the double-digit percentage drops that Generac had expected previously.
Finally, Generac investors can expect some support for the company's stock price. The company authorized a $250 million share repurchase program, which will extend for two years and give the company an ability to continue its buyback activity. During the third quarter, Generac bought 1.8 million shares, spending $65.4 million and using up its previous authorization.
Generac investors will find the latest release encouraging, but in the long run, what's more important is for the company to demonstrate its ability to produce meaningful growth in both the top and bottom lines. Until that happens, Generac investors need to keep an eye on the company to make sure it's making the most of the opportunities it has to succeed and grow.