Generac Stock Powers Up 12% on Earnings and Revenue Beats

Generac Holdings (GNRC 1.48%) stock gained 11.6% on Wednesday after the backup-power generator and energy-technology company released its first-quarter 2023 report. The market's positive reaction is attributable to the quarter's revenue and adjusted earnings beating Wall Street's expectations.

Given the challenging macroeconomic environment, investors were also likely relieved that the company reaffirmed its 2023 guidance. 

Generac's key numbers

Data source: Generac. GAAP = generally accepted accounting principles. YOY = year over year.

Core sales, which excludes the impact of acquisitions and foreign-currency exchange, fell 24%.

Wall Street was looking for adjusted EPS of $0.49 on revenue of $841 million, so the company exceeded both expectations, with the profit beat a sizable one.

In Q1, the company used cash of $18.6 million running its operations, compared with using cash of $10.1 million in the year-ago period. Free cash flow (FCF) was negative $41.7 million, down from the year-ago period's negative $36.8 million. 

Generac ended the quarter with cash and cash equivalents of $137.4 million and about $1.5 billion in long-term debt.

For context, in the prior quarter (Q4 2022), revenue slipped 2% year over year to $1.05 billion and adjusted EPS declined 29% to $1.78.

Sales breakdown by product class and geography

Product class:

• Residential product sales decreased 46% year over year to $419 million.
• Commercial and industrial (C&I) product sales jumped 30% to $363 million. (Generac also has a relatively small "other" category.)

Geographic segment:

• Domestic sales declined 26% year over year to $720 million, with acquisitions made over the last year contributing about 3% to growth.
• International sales (which consist primarily of commercial and industrial products) grew 17% to $216.5 million, driven primarily by strength in Europe. Core growth was about 19%. This metric was hurt by the strength of the U.S. dollar relative to other currencies. (Both categories include intersegment sales, so their total is somewhat higher than the company's total revenue.)

Acquisition activity 

• In February, Generac closed on its acquisition of REFU Storage Systems, a Germany-based developer of battery-storage hardware and software products, and platform services for commercial and industrial applications.
• In March, the company purchased the remaining 20% interest in Pramac, bringing its ownership to 100%. Italy-based Pramac designs and manufactures stationary, mobile, and portable generators, and energy-storage solutions.

What the CEO had to say

Here's most of CEO Aaron Jagdfeld's statement in the earnings release:

As expected, first-quarter sales were down year over year due to a challenging prior-year comparison related to the significant excess backlog for home standby products as we entered 2022. In addition, residential product sales in the current-year quarter were impacted by elevated levels of field inventory for home standby generators and a decline in clean energy products as we continue to expand our distribution network.

However, power outage activity in the quarter was well above the long-term average, helping drive significant year-over-year growth for home standby in-home consultations and a meaningful reduction in field inventory levels for these products. Our global C&I product sales were at all-time highs in the quarter and exceeded our expectations with strength across all channels domestically and most regions internationally. 

2023 guidance affirmed

Data source: Generac.

Management said in the earnings release that "shipments of residential products are still expected to remain soft during the second quarter as home standby field inventory levels continue to normalize, with a return to year-over-year sales growth in the second half of the year partially offsetting the expected first-half decline." It also continues to expect 2023 C&I product sales to grow in the mid- to high-single-digit percentage range. 

No big surprises

Generac's first-quarter results didn't include any major surprises, though the top and bottom lines were both better than widely expected because the commercial and industrial business performed better than management had projected and home standby-generator sales got a tailwind from higher-than-usual power-outage activity. That said, this business is still dealing with the significant inventory headwinds that hurt its results in the latter part of last year.

Reiterating my conclusion in last-quarter's article:

The company's long-term growth potential remains robust. Demand for its backup power products should continue to get a boost from the increasing number of climate change-driven extreme weather events. And its energy technology solutions provide it with the potential to benefit from the next generation of the electric grid.