While the whole market was down in 2022, few stocks had a worse year than Generac (GNRC 0.79%). In fact, with a decline of 71%, it was the worst performer of the year in the S&P 500.
The maker of backup generators and other power-generating devices was a high flyer for much of 2021, when its market cap essentially doubled. But the stock began to decline after peaking in late 2021 and went on to lose an incredible 71% of its value in 2022. Generac investors are licking their wounds after a terrible 2022, but is there any reason for optimism that the beleaguered stock can bounce back in 2023?
Image source: Getty Images
I've got the power
Generac is best known for its generators which serve the residential and commercial markets. In recent years, it has also increasingly used acquisitions to diversify into additional areas like solar, battery storage, and energy management systems. The company has a great track record of long-term revenue growth, increasing sales at an outstanding 18% compound annual rate since going public in 2010.
It's the undisputed heavyweight in home generators, with a market share of about 75%. However, it still has a long runway for growth ahead as it estimates that this market is only 5.5% penetrated. Management sees further growth in home standby generation as a significant opportunity, and it's feasible that the severe winter storms of December 2022, which caused millions of customers across 13 states to lose power, will reinforce homeowners' interest in having backup power sources. Generac says that every additional percentage point of penetration for backup generators adds an additional $2.5 billion in addressable market for the company.
While this is a large opportunity in its core market, Generac also says that the acquisitions it has made over the past few years have expanded the size of its served addressable market by 500% since 2018. The company now makes inverters, which convert the DC electricity that solar panels generate into AC electricity -- the type that the grid supplies and our homes and businesses use. That's a market with potential -- solar power's installed capacity is expected to grow at a 12.7% compound annual rate over the next five years.
Beyond solar, the company has also moved into battery-powered lawnmowers with the acquisition of Mean Green, smart-home solutions with the acquisition of Ecobee, and more. If Generac can capture more market share in some of these new markets, it could add significantly to the company's growth in the years ahead.
Lower expectations create an attractive valuation
While Generac was punished for its sharp reduction in guidance, it's important to note that it hasn't suddenly turned into a slow-growth or no-growth company. This is still a profitable business, and the company still expects to report that it grew revenue by 22% to 24% in 2022. That isn't as compelling as the 36% to 40% it originally guided for, but it's still pretty impressive growth.
In some ways, Generac has been a victim of its own success, as the stock surged past $500 in October 2021 on the back of terrific growth. But as it lapped those difficult comps from 2021, its growth rate slowed, and the stock fell to just below $100 a share as of the end of 2022.
The stock contended with additional challenges over the course of the year, such as a lack of technicians to install its generators. The company now has partnerships with 8,500 dealers (300 more than the previous quarter), so it is working chip away at this challenge, and it says demand remains strong. Additionally, Generac dealt with a major customer declaring bankruptcy.
One area for concern is that the company's debt has increased significantly in recent times while its cash has decreased as it has pursued acquisitions. Total debt outstanding went from about $882 million in September of 2020 to over $1.3 billion as of the most recent quarter. The company now has a debt to EBITDA ratio of about 2.15. While this isn't egregious, it is something for investors to keep an eye on.
At this point, Generac's valuation looks undemanding. The stock trades at 15 times earnings and 14 times forward earnings, putting it just below the average multiple for the S&P 500.
Generac is actively engaging in share repurchases, and the company's Board recently authorized a new share repurchase program that will allow the company to buy back up to $500 million worth of its stock over the next two years.
With this lower valuation, and against a backdrop of lowered expectations, and more share buybacks on deck the stock looks a lot more palatable as a buy.
This won't be the worst stock in the S&P 500 again
Given the company's track record of growth and the long potential runway ahead of it, it seems likely that the present issues aret a speed bump on the road to Generac's long-term success. These lower prices offer investors a potentially favorable entry point. Janney Scott Mongomery recently initiated coverage of the stock with a buy rating, while Northland Capital went a step further, calling Generac its top pick of 2023.
Both analyst firms are of the opinion that the shares are undervalued, and Northland Capital thinks that the recent series of high-profile power outages across the United States could spur demand for home standby generators. The firms' new price targets of $160 and $180 imply meaningful upside from Generac's current share price. While such targets are best taken with a grain of salt, it's clear that there is the potential for plenty of upside ahead if Generac can get back on track, making it worthy of a small or more speculative investment for risk-tolerant investors.
