Investors love stocks that consistently beat the Street without getting ahead of their fundamentals and risking a meltdown. The best stocks offer sustainable market-beating gains, with robust and improving financial metrics that support strong price growth. Does Generac Holdings (GNRC -3.54%) fit the bill? Let's take a look at what its recent results tell us about its potential for future gains.
What we're looking for
The graphs you're about to see tell Generac's story, and we'll be grading the quality of that story in several ways:
- Growth: Are profits, margins, and free cash flow all increasing?
- Valuation: Is share price growing in line with earnings per share?
- Opportunities: Is return on equity increasing while debt to equity declines?
- Dividends: Are dividends consistently growing in a sustainable way?
What the numbers tell you
Now, let's take a look at Generac's key statistics:
GNRC Total Return Price data by YCharts.
|
Passing Criteria |
Three-Year* Change |
Grade |
|---|---|---|
|
Revenue growth > 30% |
150.6% |
Pass |
|
Improving profit margin |
16.2% |
Pass |
|
Free cash flow growth > Net income growth |
118.6% vs. 206.7% |
Fail |
|
Improving EPS |
184.5% |
Pass |
|
Stock growth (+ 15%) < EPS growth |
456% vs. 184.5% |
Fail |
Source: YCharts. *Period begins at end of Q4 2010.
GNRC Return on Equity (TTM) data by YCharts.
|
Passing Criteria |
Three-Year* Change |
Grade |
|---|---|---|
|
Improving return on equity |
37.7% |
Pass |
|
Declining debt to equity |
153.4% |
Fail |
|
Dividend growth > 25% |
(16.7%) |
Fail |
|
Free cash flow payout ratio < 50% |
149.9% |
Fail |
Source: YCharts. *Period begins at end of Q4 2010.
How we got here and where we're going
Generac puts together a passable -- but not compelling -- performance by racking up four out of nine possible passing grades. One major source of that weakness is the company's free cash flow, which has diverged markedly from its net income, and that presently seems unable to support the company's dividend payments, assuming that Generac maintains a similar payout this year. However, Generac's shareholders have enjoyed strong growth in both fundamentals and share prices over the past three years, and the stock hits new peaks with regularity. But does that mean Generac will continue to rally higher, or will the backup-power generation manufacturer find its free cash flow weakness holding it back this year? Let's dig a little deeper to find out.
Generac delivered market-topping revenue and earnings per share in its latest quarter, results primarily driven by rising demand for home standby generators and for commercial and industrial backup-power generation as wretched weather continues to pound much of the United States. Fool contributor Steve Symington notes that Generac purchased the generator-product assets of ABB Group's Baldor Electric subsidiary, which is bound to result in a larger industrial product line for North American and international markets. Generac seems poised to capture more of this market because of greater scalability and a heightened focus on organic growth in commercial and industrial power generation.
However, Generac also continues to strengthen its product portfolio with inorganic growth (read: acquisitions) over the past few years. The company recently completed its acquisition of Tower Light, an Italian manufacturer of mobile light towers, which complements Generac's purchase of North American light-tower and mobile generator manufacturer Magnum Products. Fool contributor Eric Volkman notes that the acquisition of Tower Light positions Generac as a global leader in mobile power equipment rental markets, allowing the company to leverage broader product lineups and stronger global distribution networks to accelerate international expansion efforts. The company also purchased small generator-equipment manufacturer Ottomotores for $46.5 million in 2012, which helped it boost its dealer network in fast-growing Latin American markets.
Fool contributor Rich Duprey notes that Generac is well-positioned to capitalize on growing demand for emergency-power backup solutions, which spiked in the aftermath of devastating Hurricane Sandy, which ravaged the U.S. East Coast and resulted in power outages for up two weeks for some East Coasters. According to Generac, its backup-power solutions revenue could swell by an additional $2 billion for every 1% in additional market share the company can capture -- that's a huge opportunity, but Generac already controls 70% of this market, so additional growth may not be as easy as expected.
Putting the pieces together
Today, Generac Holdings has some of the qualities that make up a great stock, but no stock is truly perfect. Digging deeper can help you uncover the answers you need to make a great buy -- or to stay away from a stock that's going nowhere.
