GNRC Stock Study (9-11-23)

I recently did a stock study on Generac Holdings Inc. (GNRC at $117.66/share). Previous studies are 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 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 leads 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%.

Also over the past decade, ROE leads peer and industry averages despite trending down from 66.9% in ’13 to 14.4% in ’22 with a last-5-year mean of 26.1%. Debt-to-Capital is above peers and roughly even with the industry while trending down from 79.1% in ’13 to 43.6% in ’22 with a last-5-year mean of 45.4%.

Interest Coverage is 3.9 and Quick Ratio is 0.8. 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:

• CNN Business projects contraction of 10.9% YOY and 1.1% per year for ’23 and ’22-’24 (based on 21 analysts).
• YF projects YOY 11.3% contraction and 8.3% growth for ’23 and ’24, respectively (23 analysts).
• Zacks projects YOY 11.2% contraction and 7.6% growth for ’23 and ’24, respectively (12).
• Value Line projects 11.9% annualized growth from ’22-’27.
• CFRA projects contraction of 11.8% YOY and 2.7% 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 long-term estimate to 6.0% per year.

With regard to EPS growth:

• CNN Business projects contraction of 27.1% YOY and 1.6% per year for ’23 and ’22-’24, respectively (based on 21 analysts), along with 5-year annualized growth of 8.0%.
• MarketWatch projects contraction of 6.1% per year and growth of 0.8% per year for ’22-’24 and ’22-’25 (26 analysts).
• Nasdaq.com projects annualized growth of 35.9% YOY and 25.3% for ’24 and ’23-’25, respectively (15, 15, and 5 analysts for ’23, ’24, and ’25).
• Seeking Alpha projects 4-year annualized growth of 7.0%.
• YF projects YOY 35.5% contraction and 37.4% growth for ’23 and ’24, respectively (22), along with 5-year annualized contraction of 1.4%.
• Zacks projects YOY 35.1% contraction and 35.9% growth for ’23 and ’24, respectively (15), along with 5-year annualized growth of 10.0%.
• Value Line projects 24.2% annualized growth from ’22-’27.
• CFRA projects contraction of 36.4% YOY and 2.5% per year for ’23 and ’22-’24 along with a 3-year CAGR of 10.0%.
• M* projects long-term annualized growth of 7.3%.

The mean of six long-term estimates is 9.2%, and I am as perplexed by the lowest as I am the highest. Excluding both, the 4-estimate mean is 8.0% with the least 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 the former is already 35.0% lower YOY.

My Forecast High P/E is 25.0. Over the past 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 past 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) of $81.30 is default based on ’22 EPS. This is 29.4% 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 2.0. Total Annualized Return (TAR) is 9.5%.

PAR (using Forecast Average—not High—P/E) is 4.7%, which is less than the current yield on T-bills. If a healthy margin of safety (MOS) anchors this study, then I can proceed based on the total annualized return (TAR) of 9.5% instead.

To assess MOS, I compare my inputs with those of Member Sentiment (MS). Based on 248 studies (my study and 102 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 10.1%, 14.0%, 30.0, and 14.9. I am lower on everything but the latter (15.0). Value Line’s projected average annual P/E of 26.0 is higher than MS (22.5) and mine (20.0).

MS high / low EPS are $7.68 / $3.62 vs. my $7.25 / $5.42 (per share). My overall EPS range is higher. Value Line projects $16.00/share for high EPS, which soars above everything else.

MS LSPF of $61.30 implies a Forecast Low P/E of 16.9, which is higher than the above-stated 14.9. MS LSPF is 13.7% greater than the default $3.62/share * 14.9 = $53.94, which results in more aggressive zoning. MS LSPF is 24.6% less than mine, though, which does not bode well for MOS.

My TAR (over 15.0% preferred) is less than the 12.6% from MS. This argues for some MOS, but I would call it slim.

I track a few different valuation metrics. PEG is 2.1 and 4.6 per Zacks and my projected P/E, respectively: both overvalued. Relative Value [(current P/E) / 5-year-mean average P/E] per M* is fair at 1.0. Kim Butcher’s “quick and dirty DCF” prices the stock at 24.0 * [$19.40 – ($6.00 + $2.25)] = $267.60, which suggests the stock to be 57.0% undervalued (perhaps not surprising since the Value Line long-term EPS estimate is so much higher than all the others).

GNRC is a BUY under $106/share. My forecast high price is $181.30. Especially with limited MOS, I would look to re-evaluate closer to the meeting of my TAR criterion around $181.30 / 2 = $90.65/share.