What happened
Shares of generator maker Generac Holdings (GNRC +1.42%) jumped 3.9% as of 11:45 a.m. ET on Wednesday, boosted by a pair of positive notes from Wall Street analysts.
This morning, investment bank Northland Capital named Generac its "top pick for 2023," reports The Fly, while Janney Montgomery Scott initiated coverage of the stock with a buy rating.
NYSE: GNRC
Key Data Points
So what
Citing a series of events that caused power outages in the U.S. in December -- an earthquake in California, apparent terrorist attacks on electrical substations in North Carolina and Washington, and most recently the deadly Christmas snowstorm that led to 1.5 million homes losing power -- a Northland analyst expects demand for home standby (HSB) power generators to drive profits at Generac in 2023. In his estimation, Generac stock could nearly double to a target price of $180 by the end of next year.
A Janney Montgomery Scott analyst is nearly as optimistic. Valuing Generac stock at $160 a share, he recommends buying it despite what he thinks may be the "early stages of a downturn" in HSB demand -- the opposite of what Northland is predicting. That being said, he broadly agrees with Northland's analyst that Generac shares are undervalued.
Now what
Since peaking at nearly $500 a share in October 2021, Generac stock has lost more than 80% of its value over the past 14 months. But Janney Montgomery Scott believes that the company's "consistent free cash flow generation" more than justifies the stock's new and improved price.
There's just one problem with that theory: Although Generac used to be a consistent free cash flow (FCF) generator, churning out more than $300 million in cash profits last year and more than $400 million the year before that, it has actually burned cash in two of its past three quarters. Indeed, at last report, Generac looked like it will be heading into the fourth quarter this year with more than $107 million in negative free cash flow on its cash flow statement.
The good news here is that most analysts expect Generac to still end the year on an up note and somehow report full-year FCF of $227 million in February. The bad news is that -- even if that optimistic estimate proves correct -- at $6 billion in market capitalization, it still leaves investors paying more than 26 times FCF for a company whose FCF numbers are shrinking for a second straight year and not growing at all.
That doesn't sound like a good bet to me.
