Generac Earnings: Shares Rise on Guidance Reiteration, Normalizing Field Inventories

We maintain our $110 fair value estimate for narrow-moat Generac GNRC following the company’s third-quarter results. Shares jumped following results (up 14% at the time of writing), which we view as attributable to the company reiterating 2023 guidance despite fears of a guidance cut. We view shares as slightly undervalued.

Generac maintained its 2023 expectations for sales to decline 10%-12% year on year despite minor moving pieces. The company is seeing some weakness in core products and its solar and storage offerings within its residential segment. However, this has largely been offset by strength in its commercial and industrial business. Most importantly, the company maintained its prior commentary around home generator field inventories continuing to normalize, setting up for a more normal year of shipments in 2024.

In 2024 we expect a roughly $250 million sales tailwind year on year as home standby shipments more approximate underlying demand (the company has been under shipping underlying demand in 2023 given excess field inventories). We stress home standby sales are inherently difficult to forecast and remain highly dependent on power outage activity, which represents a key upside to our estimates.

While investors remain laser-focused on home generator inventories and order trends, we see prudent capital allocation as a key driver of shares over the longer term. The company faces the decision of how to allocate cash from its cash-cow home-generator business over the coming years. The company remains committed to funneling cash to its upstart clean energy activities combined with select share repurchases. We view the company’s clean energy endeavors with cautious optimism as it looks to relaunch its product portfolio over the next 12-18 months. Regarding share repurchases, the company repurchased $100 million in shares in the quarter at an average price of $114.