Please ensure Javascript is enabled for purposes of website accessibility

Generac Stock Jumps 6% on Earnings Crush and Brightened Outlook Amid Pandemic

By Beth McKenna – Jul 31, 2020 at 9:37AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

This stock is an under-the-radar "coronavirus stock," as sales of home backup generators are surging during the COVID-19 pandemic.

Generac Holdings (GNRC 0.74%) reported second-quarter 2020 results before the market open on Thursday. 

Investors were pleased with the results, propelling shares of the maker of backup generators and other energy technology solutions to a closing gain of 5.8% on Thursday. That brings the stock's 2020 gain up to 47%, making it a particularly strong performer in the industrial sector. The S&P 500 index has returned 1.6% over this period.

We can attribute the market's reaction to both revenue and earnings easily powering by the Wall Street consensus estimates, along with the company increasing its full-year guidance.

Yellow lightning bolt on purple background with "Power Outages" written underneath in yellow.

Image source: Getty Images.

Generac's key numbers

Metric

Q2 2020

Q2 2019

Change 

Revenue

$546.8 million

$541.9 million

1%

GAAP net income

$66.1 million

$62.0 million 7%

Adjusted net income

$88.5 million $74.9 million 18%

GAAP earnings per share 

$1.02 $0.98 4%

Adjusted EPS

$1.40 $1.20 17%

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

Core revenue growth, which excludes the impact of acquisitions and foreign currency, was also approximately 1%.

Net income includes $11.5 million of charges "relating to restructuring costs and asset writedowns to address the impact of the COVID-19 pandemic and decline in oil prices," the company said in the earnings release. Adjusted net income and EPS exclude these charges and other one-time items.

Why did net income and earnings grow more than revenue? The company's profit margin increased due to a favorable sales mix, slanted much more toward residential products than commercial and industrial products.

Wall Street was looking for adjusted EPS of $0.89 on revenue of $476.9 million, so Generac crushed both expectations.

Generating lots of cash 

Cash flow from operations was $101.8 million, up more than 1,100% from $8 million in the year-ago period. Free cash flow was $89 million as compared with negative $9.8 million in the second quarter of 2019.

While cash flows were strong, their growth wasn't as powerful as the numbers suggest. In the year-ago period, the company made a "significant working capital investment." In other words, the company had easy year-ago comparisons.  

Segment and product class results

Segment results:

  • Domestic sales rose 9% year over year to $460.8 million, driven largely by strong shipments of residential standby and portable generators. Adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) jumped 17%, driven by a favorable sales mix.
  • International sales (which consists primarily of commercial and industrial products) dropped 29% year over year to $86.1 million, and fell 25% in constant currency. The decline was largely driven by a sharp drop in demand caused by the pandemic. Even before this crisis, the commercial and industrial business was struggling to grow revenue due to slower global economic growth and geopolitical headwinds. Adjusted EBITDA, before deducting for noncontrolling interests, plummeted 77% to $1.9 million.

Product class results:  

  • Residential product sales jumped 27% year over year to $341.4 million.
  • Commercial and industrial product sales fell 33% to $154.9 million. (These categories don't add up to the company's total revenue because there is a relatively small "other" category.) 

What management had to say

Here's part of what CEO Aaron Jagdfeld had to say in the earnings release:

Second quarter revenue and earnings dramatically exceeded our expectations primarily driven by robust demand for home standby generators as a result of the heightened awareness of the need for backup power since the onset of the COVID-19 pandemic. With power outages on the rise, concerns of utility shutoffs in California, an active hurricane forecast for the upcoming season, and Americans spending more time at home, demand for home standby generators is at an all-time high.

Brightened guidance

Management increased its full-year 2020 outlook due to strong demand for its residential backup power products, offset by weakness in its commercial and industrial business.

Metric

Prior 2020 Guidance

New 2020 Guidance 

Revenue growth (decline) YOY

(10% to 5%)

5% to 8%
Adjusted EBITDA margin before deducting for noncontrolling interests 19% to 20% 21.5% to 22.5%

Data source: Generac. YOY = year over year.

Going into the earnings release, Wall Street had been modeling for 2020 revenue to decline 4.6% year over year. So the company surprised analysts significantly to the upside with its guidance.

I think it's likely Generac will exceed its 2020 outlook. If any of the factors that are expected to drive demand for home backup power solutions turn out to be worse than the company is anticipating, it should beat its guidance. Unfortunately, it seems likely to me that at least one demand driver (the pandemic in the U.S., California's wildfire season and resultant rolling blackouts, or hurricane season) will turn out worse than is currently widely forecast.

Beth McKenna has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Generac Holdings Inc. Stock Quote
Generac Holdings Inc.
GNRC
$179.46 (0.74%) $1.32

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
326%
 
S&P 500 Returns
102%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 10/03/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.