GNRC Stock Study (6-10-24)

I recently did a stock study on Generac Holdings Inc. (GNRC at $138.25/share). Previous studies are here, here, and 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 10 years, this medium-size company has grown sales and earnings at annualized rates of 15.5% and 16.0%, respectively. Lines are mostly up, straight, and parallel except for sales declines in ’15 and ’23 and EPS declines in ’15, ’22, and ’23. In my view, two straight years of EPS declines takes some luster off Quality.

Over the past decade, PTPM leads peer and industry averages despite going from 17.7% in ’14, down, up, and back down to 7.2% in ’23 with a last-5-year mean of 13.9%. ROE leads peer and industry averages despite trending down from 38.3% (’14) to 8.3% (’23) with a last-5-year mean of 21.5%. Debt-to-Capital is above peers and industry averages despite trending down from 69.0% in ’14 to 42.6% in ’23 with a last-5-year mean of 42.9%.

Interest Coverage is 4.1 and Quick Ratio is 0.86. M* rates the company “Standard” for Capital Allocation and describes its balance sheet as “sound.” Value Line gives a B++ rating for Financial Strength.

With regard to sales growth:

• YF projects YOY 3.8% and 9.3% for ’24 and ’25, respectively (based on 22 analysts).
• Zacks projects YOY 4.1% and 9.6% for ’24 and ’25, respectively (11 analysts).
• Value Line projects 11.1% annualized growth from ’23-’28.
• CFRA projects 5.4% YOY and 7.8% per year for ’24 and ’23-’25, respectively.
• M* gives a 2-year ACE of 8.1% annualized growth.

I am forecasting toward the lower end of the range at 5.0% per year.

With regard to EPS growth:

• MarketWatch projects 23.2% and 20.1% per year for ’23-’25 and ’23-’26, respectively (based on 29 analysts).
• Nasdaq.com projects 27.9% and 25.1% per year for ’24-’26 and ’24-’27 [13/4/1 analyst(s) for ’24/’26/’27].
• Seeking Alpha projects 4-year annualized growth of 8.3%.
• YF projects YOY 13.0% and 27.7% for ’24 and ’25, respectively (22), along with 5-year annualized growth of 12.0%.
• Zacks projects YOY 12.6% and 30.6% for ’24 and ’25, respectively (12), along with 5-year annualized growth of 12.0%.
• Value Line projects 16.2% (28.4%) annualized growth from ’24-’28 (’23-’28).
• CFRA projects 20.4% YOY and 24.3% per year for ’24 and ’23-’25 along with a 3-year CAGR of 21.0%.
• M* projects long-term annualized growth of 16.3%.

My 8.0% per year forecast is below the long-term estimate range (mean of five: 13.0%). Initial value is ’23 EPS of $3.27/share (down 39.7% YOY) rather than 2024 Q1 $3.63 (annualized).

My Forecast High P/E is 29.0. Over the past decade, high P/E increases from 25.1 (’14) to 47.9 (’23) with a last-5-year mean of 49.1 and a last-5-year-mean average P/E of 33.9. I am toward the lower end of the range [’14 and ’19 (25.5) are less].

My Forecast Low P/E is 15.0. Over the past decade, low P/E ranges from 12.0 in ’19 to 26.8 in ’21 with a last-5-year mean of 18.6. I am below the 10-year median of 15.7.

My Low Stock Price Forecast (LSPF) is $95.00. Default based on initial value is 64.6% less than the previous close: unreasonably low, in my opinion. My forecast is 31.3% less than the previous close and 18.9% greater than the 52-week low.

These inputs land GNRC in the HOLD zone with a U/D ratio of 0.0. Total Annualized Return (TAR) is 0.1%.

PAR (using Forecast Average—not High—P/E) is unacceptable for any size company at -5.2%. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on TAR instead. Even that falls far short of the risk-free rate.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 96 studies (my study and 31 other outliers excluded) over the past 90 days, averages (lower of mean/median) for projected sales growth, projected EPS growth, Forecast High P/E, and Forecast Low P/E are 9.8%, 16.0%, 35.0, and 17.5. I am lower across the board. Value Line’s projected average annual P/E of 25.0 is lower than MS (26.3) and higher than mine (22.0).

MS high / low EPS are $8.92 / $3.50 vs. my $4.80 / $3.27 (per share). My high EPS is less due to a lower growth rate. Value Line projects $11.40/share for high EPS, which soars above everything else.

MS LSPF of $74.60 implies a Forecast Low P/E of 21.3: higher than the above-stated 17.5. MS LSPF is 21.8% greater than the default $3.62/share * 17.5 = $61.25, which results in more aggressive zoning. MS LSPF is 21.5% less than mine, however.

My TAR (over 15.0% preferred) is much less than the 16.6% from MS. MOS in this study is robust.

With regard to valuation, PEG is 1.9 and 4.4 per Zacks and my projected P/E, respectively: the latter significantly overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is fair at 1.1.

Due to tarnished Quality described near the beginning, I think a larger MOS is warranted. I achieve that (and then some?) by using 2023 EPS (60.6% lower than ’21) as initial value. The current stock price is too high to overcome this.

U/D has GNRC a Buy under $106/share. The stock needs to approach $70 in order to meet the BI TAR criterion given a forecast high price ~$140.