Generac Powers Up With Long-Awaited Growth

By Dan

Image: Generac Holdings.

Mother Nature hasn't been kind to power-generator manufacturer Generac Holdings recently. Storms that knock out grid-based power to residential and commercial users often act as a catalyst for customers to consider buying power-generating equipment, and a lack of those major weather events has held back Generac's results over the past several quarters. Earlier in the week, Cummins had said that power-generation markets had been weak for it as well, and coming into Wednesday's third-quarter financial report, Generac investors were prepared for more of the same, expecting to see falling sales and net income once again. However, Generac managed to provide unexpected growth on the top and bottom lines, showing its resiliency even under pressure. Let's look more closely at how Generac Holdings fared during the quarter and how it managed to surprise its investors with good results.

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Generac gets energizedGenerac's third-quarter results were especially promising given the tough environment. Revenue climbed 2% to $359.3 million, defying calls for a nearly 5% drop in sales from investors. Adjusted net income jumped an even more significant 9.5% to $63.4 million, and that worked out to $0.92 per share, $0.13 better than the consensus forecast among investors.

A closer look at Generac's results gives some hints about the source of the company's strength. Residential product sales climbed 2%, with Generac overcoming a decline in shipments of home standby generators by taking advantage of the recent acquisition of Country Home Products in August. In the commercial and industrial segment, sales climbed 1.2%, with higher shipments to industrial distributors supplementing acquisition-based growth to offset the weakness among Generac's oil and gas industry customers.

Still, not everything went perfectly for Generac Holdings during the quarter. Gross margins fell another seven-tenths of a percentage point to 36.3%, as an unfavorable product mix offset pricing gains and lower costs related to weak commodities and foreign-currency markets. Operating expenses climbed by 5%, with the Country Home Products acquisition playing a factor and outweighing benefits from reduced overhead costs.

CEO Aaron Jagdfeld was glad to see the sequential improvement in Generac's results. "Despite the ongoing low power outage environment," Jagdfeld said, "shipments of home standby generators increased significant relative to the first half of 2015 as field inventory returned to a more normalized level." Jagdfeld also pointed to the company's diversification in supporting its commercial and industrial efforts.

What's next for Generac?Even with the better than expected performance, Generac remains cautious about its prospects for the remainder of 2015. Citing weak energy markets and record low power outages, the generator-maker said that it now expects net sales for the full year to come in at about $1.3 billion, which would be a decline of approximately 11% from 2014 levels. Adjusted EBITDA guidance for $270 million also points to the weakness throughout the industry.

Overall, Generac's guidance was consistent with the headwinds that Cummins cited in its own report, and in particular, what Cummins and Generac both need to see on the commercial side is for oil and gas exploration and production companies to ramp up their drilling efforts. Given the growth that both Generac and Cummins have seen from the energy boom, higher oil prices could help support future gains.

Generac didn't hesitate to follow through on its recent approval of a new stock repurchase program, buying back 2.15 million shares and spending $64.4 million of its $200 million authorization in the third quarter alone. The move suggests that Generac believes that adverse weather has beaten down its stock price unfairly and that a return to more normal conditions will spur an eventual recovery.

For long-term investors, the fact that Generac Holdings experiences extreme volatility in between surges of storm activity should come as no surprise. Yet Generac's efforts to support growth even in tough times are impressive, and if it can keep delivering solid results even under challenging conditions, the next uptick could bring outpaced gains for patient investors who are willing to wait.

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Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Cummins. The Motley Fool recommends Generac Holdings. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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