GNRC Stock Study (2-6-23)

I recently* did a stock study on Generac Holdings Inc. (GNRC) with a closing price of $122.44.

M* writes:

     > Generac Power Systems designs and manufactures power generation
     > equipment serving residential, commercial, and industrial markets.
     > It offers standby generators, portable generators, lighting,
     > outdoor power equipment, and a suite of clean energy products.

This medium-sized company has grown sales and earnings at annualized rates of 11.2% and 18.6%, respectively, over the last 10 years. Lines are mostly up and parallel except for sales/EPS declines in ’14 and ’15 along with EPS decline in recent quarters. PTPM has been cyclical—ranging from 9.3% (’15) to 18.8% (’13) with a last-5-year average of 15.7%. This is higher than peer (stated as SPXC, IR, and GTES) and industry averages.

Excluding an upside outlier of 66.9% in ’13, ROE has ranged from 15.1% (’15) to 38.3% (’14) with a last-5-year average of 30%. This leads peer and industry averages. Debt-to-Capital has trended lower since 2012 from 65.8% to 37.4% with a last-5-year average of 49.1%. This is mostly higher than peer and industry averages. Interest Coverage is 14 and Current Ratio is 2.1 (sans inventory, the Quick Ratio is 0.70).

I assume long-term annualized sales growth of 7% based on the following:

• CNN Business projects growth of 24.3% YOY and 6.5% per year for ’22 and ’21-’23, respectively (based on 20 analysts).
• YF projects 22.5% YOY growth and 8.6% YOY contraction for ’22 and ’23, respectively (22 analysts).
• Zacks projects YOY growth of 22.7% and YOY contraction of 7.1% for ’22 and ’23, respectively (7).
• Value Line projects annualized growth of 18.4% from ’21-’26.
• CFRA projects growth of 24% YOY and 15.2% per year for ’23 and ’22-’24, respectively.
• M* provides a 2-year growth estimate of 7%.

I assume long-term annualized EPS growth of 5% based on the following:

• CNN Business projects contraction of 12.5% YOY and 13.4% per year for ’22 and ’21-’23, respectively (based on 20 analysts) along with 5-year annualized growth of 10%.
• MarketWatch projects contraction of 13.2% and 4% per year for ’21-’23 and ’21-’24, respectively (25 analysts).
• Nasdaq.com projects annualized growth of 2.1% and 5.4% for ’22-’24 and ’22-’25, respectively (7, 10, and 3 analysts).
• Seeking Alpha projects 5-year annualized growth at 10%.
• YF projects YOY contraction of 10.9% and 15% for ’22 and ’23, respectively, along with 5-year annualized contraction of 1.4% (22).
• Zacks projects YOY contraction of 11.7% and 14.2% for ’22 and ’23, respectively, along with 5-year annualized growth of 10% (11).
• Value Line projects annualized growth of 20.4% from ’21-’26.
• CFRA projects 2.9% YOY contraction and 2.7% growth per year for ’23 and ’22-’24, respectively, along with a 3-year annualized growth of 12%.
• M* gives a long-term annualized growth ACE of 6.7%.

My projected growth rate is somewhat of a compromise. Seeing that ’22 is not complete, my guess is that analyst long-term estimates are based on the last annualized number. As this effectively raises the High Stock Price Forecast, I will do so with a lower growth forecast: 5% rather than 6%.

My Forecast High P/E is 22. Over the last 10 years, high P/E has ranged from 17.1 (’18) to 63.2 (upside outlier in ’21) with a last-5-year average (excluding the outlier) of 26.7.

My Forecast Low P/E is 12. Over the last 10 years, low P/E has ranged from 12 (’19) to 26.8 (upside outlier in ’21) with a last-5-year average (excluding the outlier) of 12.8.

My Low Stock Price Forecast of $79.80 is the default value. This is about 35% below the last closing price and 7.5% lower than the 52-week low price.

All this results in an U/D ratio of 2.6, which makes GNRC a HOLD. The Total Annualized Return (TAR) computes to 13.7%.

PAR is 8%, which is a bit lower than I’d like to see for a medium-sized company.

I use member sentiment (MS) to assess margin of safety (MOS) in deciding how likely it is that TAR rather than PAR can be realized. Out of 378 studies over the past 90 days (excluding my own along and 50 others with invalid low prices), projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E average 11%, 12%, 24.8, and 14.3, respectively. I am lower on all inputs. Value Line’s estimate, perhaps the most optimistic of all, seems like an upside outlier. They project a future average annual P/E of 27.5, which far outpaces my 17 and is also higher than MS 19.5.

MOS appears to be alive and well in this study.

MS Low Stock Price Forecast is $84.33: 5.7% above my own. This is not unreasonable and would put me just on the cusp of the BUY zone. I am sticking with my Forecast Low P/E, however, which results in a HOLD on these shares at $118 or higher.

*—Publishing in arrears as I’ve been doing one daily stock study while posting only two blogs per week.