Generac Earnings: Shares Rise on Normalizing Home Generator Field Inventories

We maintain our $124 fair value estimate for narrow-moat Generac GNRC following the company’s first-quarter results. Shares rose sharply (up 15% at the time of writing) on results, which we equate to low expectations. We make only minor changes to our model and view shares as fairly valued following the jump.

Generac’s 2023 can be divided into two halves: the first half is expected to be weak as the company works through elevated levels of channel inventory for its home standby generators, while the second half should return to more normalized results. First-quarter results were particularly weak, with revenue for the company’s residential products dropping 46% year on year, consistent with expectations. The most important takeaway to us from results was that field inventories continue to normalize. Days of field inventories fell to 1.4-1.5 times normal, down from 1.7 times normal in fourth-quarter 2022 and 2 times normal in third-quarter 2022. The company expects field inventories to approach normal around midyear, which should support stronger results in the second half.

Generac continues to focus on expanding its clean energy capabilities across both residential and commercial/industrial end markets. Within its residential activities, 2023 is expected to be a reset year for its solar and storage portfolio with a focus on building distribution capabilities and correcting prior reliability problems. Clean energy remains an area of interest for additional acquisitions.

Longer term, we reiterate our view that Generac’s generators will face increased competition from new technologies, such as battery storage. Management’s strategy to date has been to turn this threat into an opportunity via acquiring businesses in these areas. However, we view this strategy with cautious optimism and see risk that such investments don’t turn out as planned.