What happened
Investors in Generac Holdings (GNRC +0.87%), a leading manufacturer of generators and other power products, didn't have to wait until Halloween to get scared off last month. Providing a fright in the middle of the month, management dampened shareholders' spirits with a downwardly revised 2022 forecast. In the days that followed, Wall Street's pessimistic attitude toward the stock provided even more fuel for the sell-off.
According to data from S&P Global Market Intelligence, shares of Generac plunged 34.9% in October.
NYSE: GNRC
Key Data Points
So what
With a former customer, Pink Energy, ending its relationship with Generac and filing for bankruptcy, the company foresees a less auspicious 2022 than it had previously expected. But that's not the only factor figuring into management's downwardly revised forecast; warranty-related charges are another issue. As for revenue, management had originally guided for growth of 36% to 40% in 2022; it now forecasts the top line to rise 22% to 24%.
Unsurprisingly, the company also believes profits will be compromised. Generac expects to take pretax charges of about $55 million, consisting of $37 million from "clean energy product warranty-related matters" and $18 million related to Pink Energy. Consequently, it expects a less robust net income margin (before deducting for noncontrolling interests) of 9% to 10% as opposed to the original guidance of 13% to 14%.
In the days that followed Generac's revised outlook, analysts weighed in with bearish takes on the stock.
- KeyBank downgraded shares to sector weight from overweight.
- Roth Capital downgraded the stock to sell from buy, slashing the price target to $75 from $320.
- Truist lowered its price target to $170 from $225.
Now what
The start of a new month hasn't provided much relief for Generac's stock, which has fallen about 13% through the first four days of November. And it's quite possible that it will continue to inch lower in the coming days.
Forward-looking investors, however, shouldn't dismiss the stock entirely based on its recent downturn. While the bankruptcy filing of a major customer and hefty warranty-related charges are pressuring the bottom line, they aren't insurmountable hurdles that preclude the company from prospering in the future. Remember: Generac still projects 22% to 24% top-line growth in 2022.
Regarding the analysts' downgrades and reduced price targets, investors should always remember that Wall Street's time horizon is often shorter than the multiyear holding periods that long-term investors favor. Therefore, take the analysts' opinions with a dash of salt.
