Generac Stock Pops 4.2% on Earnings Beat and Brightened Outlook Amid California Blackouts

Before the opening bell on Thursday, Generac Holdings (GNRC 2.48%) reported third-quarter 2019 results that investors considered a Halloween treat. 

Shares of the Wisconsin-based maker of backup generators and other power solution products rose 4.2% on Thursday. For the year, the stock -- which set an all-time high on Thursday -- is up 94.3%, versus the S&P 500 index's 23.2% return.

We can attribute the market's reaction to both revenue and earnings easily beating Wall Street's consensus estimates, along with the company increasing its full-year guidance. Its brighter outlook stems from robust demand for residential backup power solutions in the wake of Northern California's historic blackouts. Over the last few weeks, electric utility PG&E -- which filed for bankruptcy protection in January -- has instituted several rounds of widespread power shutoffs during dry and windy weather conditions aimed at preventing its equipment from starting additional raging wildfires.

Here's how the quarter worked out for Generac and its investors.

Image source: Getty Images.

Generac's key numbers

Data source: Generac. GAAP = generally accepted accounting principles.

Core revenue growth, which excludes the impact of acquisitions and foreign currency, was also approximately 7%.

Operating income edged down because operating expenses increased faster than revenue at 19.6%. This was "primarily driven by additional employee headcount related to strategic initiatives, higher marketing and promotional spend, recurring operating expenses from recent acquisitions and higher intangible amortization expenses," the company said in its earnings release.

Wall Street was looking for adjusted EPS of $1.33 on revenue of $582.8 million, so Generac comfortably exceeded both expectations.

Generating lots of cash along with power

Cash flows are often a better measure of a company's performance than operating income and net income, or "earnings," which are simply accounting measures. Generac's Q3 cash flow performance packed some power: Cash flow from operations was $111.2 million, up 88% from the year-ago period. Free cash flow was $100.8 million, more than double the year-ago period's $47.0 million.

Segment and product class results

Segment results:

• Domestic sales rose 9.2% year over year to $498.2 million, while core sales growth was 8.5%.
• International sales declined 3.1% to $103.0 million, while core sales were approximately flat with the year-ago period. The company attributed these results to "economic softness in certain regions of the world."

Product class results: 

• Residential product sales rose 7.4% to $335.0 million, with core sales growth of approximately 7%. 
• Commercial & industrial (C&I) product sales increased 4.1% to $214.9 million, with core sales growth of approximately 5%. (These categories don't add up to the company's total revenue because there is an "other" category.) 

Darker California, brighter guidance

Management increased its full-year 2019 outlook due to strong demand for its residential backup power products, which was partially offset by slowing demand for its commercial and industrial products because of softening macroeconomic conditions.

Data source: Generac. YOY = year over year. EBITDA = earnings before interest, taxes, depreciation, and amortization.

Going into the earnings release, Wall Street had been modeling for 2019 revenue growth of 7.9% year over year.

Climate change is here

If you believe -- as I do -- that climate change is going to increase the frequency and severity of power outages across the globe, than Generac is a stock that you may want to further explore.