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Hurricane Sandy Boosts Generac Sales, Earnings Power
By: Investor's Business Daily
Propelled by Mother Nature's wrath,Generac Holdings ( GNRC ) 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 $127.1 million.
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 adds.
"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 earlier.
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 purposes.
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 effectively.
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 call.
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 leads.
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 2014."
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 companies.
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 ( CMI ).