GNRC Stock Study (6-12-23)

I recently did a stock study on Generac Holdings Inc. (GNRC) with a closing price of $117.66. The original study is here.

Value Line writes:

     > Generac Holdings Inc. designs and manufactures a wide range
     > of generators and other engine-powered products for the
     > residential, light commercial, industrial, and construction
     > markets. Its products are fueled by natural gas, liquid
     > propane, diesel, and Bi-Fuel. Acquired Ottomotores, 12/12;
     > Tower Light, 8/13; Country Home Prod., 8/15; and Pramac
     > Group, 3/16. Generac’s products are sold through indep.
     > dealers, retailers, wholesalers, and equipment rental cos.

Over the past decade, this medium-size company has grown sales and earnings at annualized rates of 13.8% and 17.5%, respectively. Lines are mostly up, straight, and parallel except for sales/EPS declines in ’14 and ’15 and an EPS decline in ’22. PTPM has led peer and industry averages despite going from 18.8% in ’13, down, up, and back down to 11.1% in ’22 with a last-5-year mean of 15.5%.

Over the past decade, ROE also leads peer and industry averages. Excluding an upside outlier of 66.9% in ’13, ROE goes from 38.3% in ’14 down, up, and back down to 14.4% in ’22 [may prove to be a downside outlier] for a last-5-year mean of 26.1%. Debt-to-Capital has trended lower from 79.1% in ’13 to 43.6% in ’22 with a last-5-year mean of 45.4%. This is above peer and industry averages although it does cross below the latter in ’19. Interest Coverage is 6.6 and Quick Ratio is 0.69. M* rates the company Standard for Capital Allocation and Value Line gives a B++ rating for Financial Strength.

With regard to sales growth:

• CNN Business projects contraction of 10.9% YOY and 1.1% per year for ’23 and ’22-’24 (based on 20 analysts).
• YF projects YOY 9.6% contraction and 9.9% growth for ’23 and ’24, respectively (23 analysts).
• Zacks projects YOY 9.6% contraction and 8.4% growth for ’23 and ’24, respectively (10).
• Value Line projects 11.9% annualized growth from ’22-’27.
• CFRA projects 7.2% YOY contraction and 0.6% growth per year for ’23 and ’22-’24, respectively.
• M* gives a 2-year ACE of 0.7% annualized growth.

With sources projecting near-term contraction, I am halving the one long-term estimate to get my 6.0% forecast.

With regard to EPS growth:

• CNN Business projects contraction of 26.3% YOY and 1.0% per year for ’23 and ’22-’24, respectively (based on 20 analysts), along with 5-year annualized growth of 8.0%.
• MarketWatch projects contraction of 1.6% per year and growth of 3.0% per year for ’22-’24 and ’22-’25 (26 analysts).
• Nasdaq.com projects annualized growth of 30.4% and 22.3% for ’23-’25 and ’23-’26, respectively (13, 14, and 4 analysts for ’23, ’25, and ’26).
• Seeking Alpha projects 4-year annualized growth of 7.0%.
• YF projects YOY 27.3% contraction and 34.2% growth for ’23 and ’24, respectively (19), along with 5-year annualized contraction of 1.4%.
• Zacks projects YOY 28.6% contraction and 30.4% growth for ’23 and ’24, respectively (13), along with 5-year annualized growth of 10.0%.
• Value Line projects 27.1% annualized growth from ’22-’27.
• CFRA projects 26.7% YOY contraction and 2.0% growth per year for ’23 and ’22-’24, along with 3-year CAGR of 10.0%.
• M* projects long-term annualized growth of 7.3%.

I’m as perplexed by the lowest long-term estimate as I am the highest. Excluding both, the 4-estimate mean is 8.1% with the lowest at 7.0%. I am forecasting 6.0%—just below the latter—and using ’22 EPS of $5.42/share as an initial value rather than Q1 ’23 $3.92 (annualized) since most analysts project contraction limited to near-term.

My Forecast High P/E is 25.0. Over the last decade, high P/E has ranged from 17.1 in ’18 to 65.3 in ’22 with a last-5-year mean of 43.0. The last-5-year-mean average P/E is 29.6. I am forecasting below the latter.

My Forecast Low P/E is 15.0. Over the last decade, low P/E has ranged from 12.0 in ’19 to 26.8 in ’21 with a last-5-year mean of 16.1. I am forecasting below the 10-year median of 15.5.

My Low Stock Price Forecast (LSPF) is the default of $81.30 based on ’22 EPS. This is 30.9% less than the previous closing price and 5.8% less than the 52-week low.

These inputs land GNRC in the HOLD zone with a U/D ratio of 1.8. Total Annualized Return (TAR) is 9.2%.

At 4.4%, PAR (using Forecast Average—not High—P/E) is too low for a medium-size company. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 278 studies done in the past 90 days (my study along with 105 outliers excluded), averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 9.3%, 10.0%, 28.0, and 14.8. I am lower across the board. Value Line projects a future average annual P/E of 26.0, which is higher than MS (21.4) and mine (20.0). MOS seems to be robust.

With regard to other data, MS high and low EPS are $8.22/share and $5.14/share compared to my $7.25 and $5.42. My high EPS is lower due to a lower EPS growth rate. My low EPS is higher because 88 studies used $3.92 (Q1 ’23) as low EPS. MS has a LSPF of $75.90, which is 6.6% less than mine. This is consistent with the default value of $5.14 * 14.8 = $76.07.

GNRC is a BUY under $106/share.