Generac Suffers an Earnings Brownout

Source: Generac Holdings.

For most companies, tough weather conditions are always a negative. In the power-generator industry, though, companies like Generac Holdings have often thrived when bad storms bring power lines down and leave millions of residents without electricity from the grid. Still, coming into Thursday morning's first-quarter financial report, Generac investors were nervous about the fact that despite the cold winter, relatively few storm events had a major impact on the grid. As it turned out, Generac's quarter did fall short of what most investors had expected, but other factors that many wouldn't have thought of played a role in holding back the generator maker's results. Let's look more closely at Generac's latest results and what they mean for its future.

Generac cuts its growth powerGenerac's first-quarter performance reflected a considerable slowdown for the generator specialist. Revenue of $311.8 million was down almost 9% from year-ago levels, which was considerably worse than the 5% sales decline that most of those following the stock were looking to see. The impact on earnings was even more severe, with adjusted net income falling by about a third and earnings per share of $0.49 falling 20% below the consensus estimate among shareholders.

Neither of Generac's two major product lines performed well. The Commercial and Industrial division suffered the larger decline in revenue, with sales dropping 15% as Generac cited a decline in shipments to its customers in two key industries. Yet sales were also sluggish on the residential side, with revenue falling more than 4% on weaker than expected levels of power outages across its geographical market. In addition, tough winter conditions hampered installation efforts for many residential customers, slowing the rate of natural demand for the market.

Other factors also hit Generac. Gross margins fell 2 percentage points to 32.9%, with Generac having to absorb some costs due to the slowdown in key ports on the West Coast. Increased marketing and advertising expenses pushed operating expenses up more than 6% from the year-ago quarter.

CEO Aaron Jagdfeld took a long-term view on responding to the tough conditions. "The rapid decline in oil and gas related investment," Jagdfeld said, "coupled with continued softness in capital spending in the telecom sector had a negative impact on our [commercial and industrial] product shipments during the quarter." Jagdfeld noted the challenges of having multiple end markets perform badly at the same time.

Source: Generac Holdings.

When will Generac power back up?Even with the winter having fallen short of expectations, Generac thinks that times will get better. As Jagdfeld put it, "Despite a softer demand environment in the near term, we remain focused on driving awareness for our products, expanding and developing out distribution, launching innovative new products, and controlling costs."

Still, improvement will take time, and the poor start to the year led Generac to cut its guidance for 2015. Generac now expects roughly flat sales for the year, even under the assumption that a slow power-outage environment in the first half of 2015 will give way to more typical conditions later in the year. Adjusted operating earnings are also likely to see growth disappear for the year, according to the company.

The good news, though, is that Generac has left itself far better diversified than it was in the past. With solid exposure to both industrial and residential applications, Generac isn't entirely vulnerable to the vagaries of the weather.

Still, investors were unhappy with Generac's results, sending the stock plunging 8% in the first two hours of pre-market trading following the announcement. Without the storm-driven demand that Generac has had in several past years, the company will have to prove to shareholders that it can keep growing even when Mother Nature doesn't make the need for its products eminently clear.

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