Shares of Generac Holdings (NYSE:GNRC) hit a 52-week high on Wednesday. Let's take a look at how it got there and see if clear skies are still in the forecast.
How it got here
What do you get when you mix a hurricane with a company that controls about 70% of the residential market share for standby generators? The answer: some very excited investors.
Not to make light of what is a very serious and tragic situation on the East Coast, Generac, along with home improvement stores like Home Depot (NYSE:HD) and Lowe's (NYSE:LOW) which sell everything needed to repair a damaged home or business, are likely to receive a sizable bottom-line boost to their profits related to hurricane Sandy. The rebuilding effort on the East Coast is bound to take months, and certain homes and businesses are relying on generators to handle their power generation over the next few days.
Natural disasters tend to have the short-term effect of making consumers more self-aware, and should have a positive impact of coercing them to purchase generators like never before over the next quarter or two.
Prior to hurricane Sandy, Generac was doing pretty darn well on its own. In its just-released third-quarter results, the company noted sales growth of 25.6% while cash flow advanced 14%. Some of its growth has come from acquisitions, but strong residential and commercial organic growth has been the real driver behind it raising its outlook for the remainder of the year. Also, the announcement of a $6 special dividend, financed through cash and debt, drew a lot of investors to the company beginning in the summer.
What could derail Generac
It's tough to imagine Generac running into any near-term problems, but it does have challenges to contend with that could derail its recent rally.
For one, investors often allow their emotions to get the better of them when natural disasters occur. Yesterday's 20% pop, for instance, was a nice treat for shareholders, but is possibly overdone, all things considered.
Competition is another concern as some larger companies are beginning to note the lucrative nature of the generator business following multiple recent natural disasters. Caterpillar (NYSE:CAT), for instance, now offers a full line of generators capable of running on gas, natural gas, and other alternative fuels. Briggs & Stratton (NYSE:BGG), the second-largest producer of residential standby generators, has seen product sales falling with one notable exception: generators. Given the widespread nature of this disaster, don't be surprised if Briggs & Stratton boosts its generator producing capabilities.
Now for the $64,000 question: What's next for Generac? That question depends largely on the carryover effect of generator sales after the impact of hurricane Sandy is dealt with, and whether it can maintain its leading residential market share over its much larger rivals.
Our very own CAPS community gives the company a four-star rating (out of five), with 83.3% of members expecting it to outperform. Roughly two months after making a CAPScall of outperform on Generac, my call is up a staggering 62 points.
Although I'm tempted to call it a day after a quick 62-point gain, I've decided not to succumb to the emotional trading surrounding Sandy and let Generac grow over the long term. As long as it maintains significant residential market share while making accretive acquisitions, there's no reason it can't head higher. Generac has solid pricing power and consumers have yet another reason to think about preparing for the next storm.
Are commercial and residential standby generators a source of future growth for Caterpillar? Find out the answer to this question and much more by getting your copy of our latest premium research report on Caterpillar. Crammed with in-depth analysis on the opportunities and threats facing Caterpillar – and complete with a year of regular updates – this report will give you the tools needed to make smart long-term investing decisions. Click here to get your copy.
As someone with family and friends on the East Coast, I also encourage you to donate to the American Red Cross or your favorite charity to help those less fortunate cope with this disaster. Thank you!
Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.
Motley Fool newsletter services have recommended buying shares of Home Depot. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.