Earnings Soar; This Climate Change Stock Is a Buy
Generac stock is up 90% in 2021, but has a long runway for growth stemming from the effects of climate change and the global transitioning to clean energy.
Jul 29, 2021 https://www.fool.com/investing/2021/07/29/generac-earnings-soar-this-climate-change-stock-is/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article
Year-over-year revenue and adjusted EPS surged 68% and 71%
Management raised 2021 revenue guidance by about 6%
Generac Holdings (NYSE:GNRC), which makes backup power generators and other energy technology solutions, reported powerful second-quarter 2021 results before the market open on Wednesday.
Shares opened more than 7% lower on Wednesday, but climbed back and closed down just 1.8%.
The drop in the stock likely mostly stems from some investors (or at least short-term traders) focusing on what they viewed as a hiccup in the report, which overall was stellar. However, a portion of the decline can probably be attributed to recent market dynamics, as the market has struggled during the last couple of days.
The stellar features of the report include Q2 revenue and earnings beating Wall Street's expectations, and management solidly raising full-year 2021 revenue guidance. The minor blip was management slightly lowering its 2021 outlook for the profitability metric
In 2021 to date (July 28), Generac stock is up 89.5% compared the S&P 500's 18.1% return. (A five-year stock chart follows below to show the bigger picture.)
Generac's key numbers
GAAP operating income
$183 million $90 million 103%
GAAP net income
$66 million 92%
Adjusted net income
$153 million $88 million 74%
GAAP earnings per share
$2.01 $1.02 97%
$2.39 $1.40 71%
DATA SOURCE: GENERAC. GAAP = GENERALLY ACCEPTED ACCOUNTING PRINCIPLES.
Revenue and adjusted earnings set all-time quarterly records. Given the company was founded in 1959 (it went public in 2010), such records are particularly impressive.
The company's "core sales" grew a robust 64% year over year. (This metric excludes the impact of acquisitions and foreign currency exchange).
Wall Street was looking for adjusted EPS of $2.31 on revenue of $863 million, so the company comfortably surpassed both expectations.
Granted, Generac had relatively easy year-over-year comparables, as the pandemic hurt its commercial and industrial business in the year-ago period. Nonetheless, even taking into consideration the modest growth in the year-ago period (year-over-year sales and adjusted EPS rose 1% and 17%, respectively), the Q2 2021 performance was still strong.
Cash flows were solid. Cash flow from operations was $122 million, up 20% year over year
. Free cash flow was $96 million, up 8%.
Sales breakdown by product class and geography
Residential product sales rocketed 76%
year over year to $600 million.
Commercial and industrial product sales surged 64%
to $254 million. (These categories don't add up to the company's total revenue because there is a relatively small "other" category, which accounted for about 7% of sales.)
Domestic sales soared 70% year over year to $784.1 million, with acquisitions made over the last year contributing about 2% of growth.
International sales (which consist primarily of commercial and industrial products) jumped 58% to $135.8 million, and core growth was about 45%.
What the CEO had to say
Here's much of what CEO Aaron Jagdfeld had to say in the earnings release:
Second quarter results were again exceptional... We are particularly proud of achieving this tremendous top-line growth along with a record level of adjusted EBITDA [earnings before interest, taxes, depreciation, and amortization] despite numerous supply chain challenges.
Shipments of home standby generators were almost double
compared to the prior year due to incredible demand for these products and our successful capacity-expansion efforts. Our PWRcell energy storage systems
were also up dramatically compared to the prior year as well as sequentially. ... Additionally, shipments of C&I [commercial and industrial] products were up significantly over the prior year as we continue to see demand recover across a number of markets and geographies from the prior-year pandemic lows, with growth of these products now solidly above 2019 levels.
DATA BY YCHARTS.
Full-year 2021 guidance
Management increased its 2021 sales outlook but slightly lowered its profitability expectation. The main reasons for the sales guidance hike are the company's production of home standby generators at a better-than-expected rate, and the increasing demand for its energy storage systems.
The lowering of the net income margin metric was due to input costs expected to be higher than management previously projected because of rising commodities and logistics costs. Logistics costs are still elevated due to the pandemic.
New 2021 Guidance
Prior 2021 Guidance
Revenue growth YOY
47% to 50%
40% to 45%
Net income margin before deducting for non-controlling interests YOY 15.5% to 16% 16% to 17%
DATA SOURCE: GENERAC. YOY = YEAR OVER YEAR.
Revenue guidance includes about 3% of favorable impact from acquisitions and foreign currency exchange.
A stock to consider buying
In short, Generac's Q2 report was stellar. I encourage long-term investors to further explore this company. It's likely to get a stronger tailwind from the effects of climate change (increasing frequency and severity of power outages due to extreme weather events) and the global transitioning to clean energy than Wall Street analysts have taken into account in their long-term growth projections, in my opinion.
Jagdfeld said on the earnings call that guidance doesn't include the potential for preemptive electric power shutoffs by utilities in any parts of the country. These shutoffs increase demand for the company's home standby generators. Over the last two years, utilities instituted multiday shutoffs several times across California during dry and windy weather to help lessen the potential for their equipment to contribute to the spread of wildfires.
In other words, if there are any pre-emptive power shutoffs through year-end, Generac's 2021 guidance will likely prove too conservative.