The hurricanes that hit Puerto Rico, Florida, Texas, and other parts of the Gulf Coast and Caribbean brought devastation in their path, and millions of people are still working to recover fully from the damage that they caused. The storms revealed the shortcomings of the electrical grid in many areas, and that served as a wakeup call for many homeowners and businesses that the products that Generac Holdings (GNRC -0.76%) manufactures can be a necessity in times of trouble.
Coming into Wednesday's third-quarter financial report, Generac investors had expected to see an uptick in growth stemming from heightened awareness of the need for backup power solutions. Generac's numbers were somewhat stronger than even those expectations, and the company is optimistic that the future will bring even more business from customers seeking to protect themselves from the next big storm. Let's take a closer look at how Generac Holdings did and what's ahead for the generator maker.
Image source: Generac Holdings.
Generac turns on the lights
Generac's third-quarter results showed the influence of Mother Nature's recent wrath. Sales jumped more than 22% to $457.3 million, which was a new record and was far greater than the $420 million that most of those following the stock were looking to see. Adjusted net income was up a more modest 9% to $57.8 million, but the resulting figure for adjusted earnings per share came in at $0.93, topping the consensus forecast among investors for $0.88 per share.
Several factors drove Generac's revenue growth. The acquisition of engine-control specialist Motortech added more than $10 million to the company's overall top line, climbing from the pace in previous quarters. The residential segment of the business saw the bulk of the growth, climbing more than 30% on strong demand. Even though the commercial and industrial segment lagged behind somewhat, sales growth of almost 17% was still relatively strong.
One negative consequence from the storms was a hit to gross margin, which fell 2.5 percentage points to 34.4%. Generac said that the drop came from a shift toward sales of portable generators and mobile products, because they tend to carry lower margin than its other products.
Generac saw an interesting rise in international sales during the quarter, which outpaced growth rates in its domestic segment. The Motortech acquisition played a key role in lifting international sales by 25%, but higher shipments of residential and commercial products to Europe and Latin America also helped lift Generac's results worldwide. Domestic sales climbed 22% from year-ago levels, and both segments enjoyed gains in adjusted pre-tax operating earnings.
CEO Aaron Jagdfeld was happy with how the quarter went. "The active hurricane season drove significant shipments of portable generators during the quarter," Jagdfeld said, "as our team worked diligently with our channel partners to quickly get these products to customers in the storm-affected areas." The CEO also said that in-home consultations soared across all regions.
Can Generac power up?
There's usually a delayed impact from natural disasters in producing business for Generac, and the company sees favorable conditions continuing throughout the year. In Jagdfeld's words, "We have ramped up production for home standby generators to meet the current and anticipated increased demand for these products, and we're also early in the process of replenishing our portable inventories back to more normalized levels."
Because of anticipated higher demand, Generac once again made upward revisions to its guidance. The company now expects revenue to climb 14% to 15% from 2016 levels, which is roughly double its previous projection. Core organic sales growth should climb 9% to 10%, up from just 2% to 3% previously. Net margin will come in at 8%, up from previous predictions for 7% to 7.5%, and Generac expects good results from operating and free cash flow.
Generac investors were happy with the news, and the stock jumped 5% in pre-market trading following the announcement. Storms come and go, but no one will soon forget the impact of these hurricanes, and that should help raise awareness for backup power generation solutions well into the future.
