Propelled by Mother Nature's wrath,Generac Holdings (
) is powered up.
Generac, the nation's No. 1 maker of home standby and portable
generators, saw its business surge after Hurricane Sandy
devastated the Northeast, leaving more than 9 million homeowners
and businesses without power at its peak.
The outages caused by the superstorm sparked such strong
demand, every one of Generac's portable generators stocked by
distributors and retailers in the Northeast sold out within weeks
of the event, says CEO Aaron Jagdfeld.
That helped boost fourth-quarter sales 28%, faster than the
26% gain in the third quarter. Profits rose 14%, well ahead of
the third quarter's 4% increase.
Generac's business got another jolt in the storm's aftermath
as customers opted to stay a step ahead of the next outage by
installing standby generators. Jagdfeld says there's typically
six to 12 months of elevated "follow-on" demand for standby
generators as more homeowners and businesses become aware of the
importance of having a backup power solution.
Generac is experiencing that robust follow-on demand for its
home standby generators now, he says, which is what drove its
strong first-quarter numbers.
First-quarter sales surged 36% to $399.6 million, sailing past
estimates by analysts polled by Thomson Reuters for $365.83
million. Profits climbed 26% to $1.21 a share, well ahead of Wall
Street's forecast of 96 cents. It was the 11th straight quarter
Generac beat Wall Street's sales and earnings forecasts.
Residential product sales soared 45.8% to $255.2 million.
Generac, which also makes generators for commercial and
industrial use, saw that segment's product sales rise 21% to
Hurricane Sandy came a little more than a year after Hurricane
Irene pounded the East Coast in August 2011, leaving millions
without power. The impact of the back-to-back storms has
propelled sales for Generac.
"More recently, our sales have accelerated because of the
tremendous combination of Hurricane Irene and Hurricane Sandy
over the last two years in the same areas," Jagdfeld told IBD.
"This serial effect of these major events has driven awareness in
parts of the country like the Northeast that these types of
products are necessary."
Power generators are viewed as a luxury item until you lose
power for a week and then you feel the need to have one, adds
KeyBanc Capital Markets analyst Jeffrey Hammond.
The number of days people lost power and the amount of people
who lost it during Hurricane Sandy was "unprecedented," he
"Because of the disruptive nature of this storm after
Hurricane Irene, if some people were questioning if they should
buy a generator, they're buying one now," he said.
When reporting first-quarter results May 2, Generac revised
upward its sales guidance for full-year 2013 due to continued
strong demand for home standby and portable generators. Full-year
2013 net sales are now expected to increase at a low- to
mid-teens rate over the prior year, which is an increase from the
approximately 10% rate previously expected. It forecast sales for
the second quarter to increase between 30% and 35% vs. a year
The sales guidance assumes no material changes in the current
macroeconomic environment and no major power outage events for
the remainder of 2013.
Generac's standby generators operate on either natural gas or
liquid propane and are permanently installed with an automatic
transfer switch, which Generac also manufactures. Its portable
generators are fueled by gasoline. They serve as an emergency
home backup and are also used for construction and recreational
Roughly 60% of Generac's business is in the residential
market, says Jagdfeld. He pegs its share of the home standby
generator market at 70%.
That's a strong position to be in. John Quealy, an analyst
with Canaccord Genuity, says we're entering a period when storms
are seemingly bigger and more devastating and are knocking out
power for longer periods. Generac, he adds, provides the ability
to almost have insurance against these types of situations.
Wall Street has noticed: "The stock performed super in the
back half of 2012 off of Hurricane Sandy," said Quealy. "It's
done a great job thus far in 2013 with strong revenue growth and
beating estimates. Generac is the latest example of a company
that has good technology, good market share, and where end-market
penetration is starting to pick up."
Jagdfeld figures only 3% of U.S. households own one of its
home standby generators. There's strong growth potential as it
increases its penetration rate.
Every 1% of additional market penetration represents about a
$2 billion market opportunity, he estimates.
Jagdfeld says he isn't sitting around waiting for another
Hurricane Sandy to increase that penetration rate.
Generac has developed a proprietary marketing tool called
"AMP," launched in the fourth quarter, to find the most likely
purchasers of home standby generators -- and market to them more
This is done through the combination of current owner data on
the exact location of its installed products, third-party
demographic data matching nearby households that represent its
mostly likely target buyer and its power outage tracking
database, Jagdfeld said on the fourth-quarter conference
With this highly targeted approach, Generac can directly
market via a number of vehicles, such as direct mail, email,
telemarketing or even door-to-door sales efforts to create sales
Generac's growth strategy includes acquisitions. It's done
three buys since October 2011. Its most recent deal was the $46.5
million cash purchase of Ottomotores UK Ltd., including the
operations of Ottomotores Mexico and Ottomotores Brazil, from a
subsidiary of TT electronics plc.
The buy, which closed in December, was a way for Generac to
expand internationally, says Jagdfeld. Until the acquisition, 98%
of its revenue was from the U.S. and Canada, he says.
"Ottomotores is a major market share player in the growing
Latin American standby power market, and provides us with the
essential elements of a local manufacturing presence, added
distribution and higher-power products that we believe are
critical for us to begin building a foundation to successful
compete in the global market for backup power generation," he
said in a statement.
While analysts polled by Thomson Reuters see a 31% pop in
second-quarter earnings, they see only a 1% gain in the third
quarter and an 18% decline in the fourth quarter. For the full
year, they see an 8% rise to $3.44. They forecast no growth in
2014 and a 49% decline in 2015.
Why the expected slowdown? "The company's guidance and
consensus estimates do not bake in any additional storm activity,
and with tough compares in the third quarter and fourth quarter
from Hurricane Sandy last year, growth is more muted," said
Hammond. "The analysts have likely taken a similar tact in
Still, watchers see plenty of growth opportunities as it
expands penetration of the home standby generator market, adds
new products to the mix and expand its distribution.
Generac sells its products internationally through independent
dealers, retailers, wholesalers and equipment rental
In the home standby generator market, Briggs & Stratton
BGGis among its rivals on the home standby home generator and
portable generator markets. In the market for standby commercial
and industrial generators, its primary competitors
includeCaterpillar CATandCummins (