What Generac’s Earnings May Say About the Strength of the Economy

Generac Holdings, Inc. NYSE: GNRC is showing investors what happens when you miss on earnings in a quarter where over 80% of companies have beaten expectations. Shares of GNRC stock are down over 24% in midday trading after the company reported mixed earnings results. If that holds, it will be the worst performer among stocks in the S&P 500 Index. 

The good news is that Generac beat estimates on the top line, generating revenue of $1 billion, which was higher than the $975 million that was projected by analysts. It’s the bottom line that is more problematic for investors. The company delivered $1.08 earnings per share (EPS), which was lower than the $1.16 EPS that analysts were expecting.  

However, both results are sharply lower on a year-over-year (YOY) basis. That's a pattern that’s been in place for the last few quarters. 

And by remarks made by the company in issuing its full-year forecast, that pattern is unlikely to change anytime soon. The company is now forecasting net sales to decline between 10% and 12% for the full year. That’s down from its previous forecast for a decline of between 6% to 10%.  

Is this dip a buying opportunity for investors? A forward P/E ratio of 26x earnings suggests that Generac is far from a cheap stock. But if the sell-off is called for, when might investors want to get in? The answer is likely to come from the economy.  

Demand Drivers are Still in Place 

Generac management insists that the megatrends for its long-term growth are as relevant as ever. Those include the increase of severe weather events, particularly in areas with an aging electric infrastructure. 

That may be true. It’s one of the arguments I’ve made in favor of GNRC stock. And to be fair, revenue although down on a YOY basis remains higher than pre-pandemic levels.  

The problem is that earnings are not following suit. And earnings growth is one of the single best predictors for stock price growth.  

Softer Than Expected Consumer Demand 

There’s no way of verifying the company’s data, but to paraphrase management on the conference call, demand delayed may not be the same as demand denied. In short, potential customers are not saying “No” to Generac, they’re saying “not now.”  

There’s a reason for that. Generac’s residential products are “big ticket” purchases. The low-end model of Generac’s whole home generators is around $1,999, but it may not be appropriately sized for every home. And the top-of-the-line model is priced in the thousands of dollars. 

That’s an expense that consumers are looking to avoid in an economy in which they are paying more for their everyday essentials. And with oil prices on the rise, it’s likely that consumers will be facing higher prices, not lower prices by the end of the year. 

This isn’t to go off an economic tangent. But Generac relies heavily on the consumer-facing side of its business, and that side of the business is taking the biggest hit.  

Wait for Confirmation (or the Weather) Before Buying GNRC Stock 

If you believe that demand for Generac’s products may be simply a cyclical casualty, the stock could present investors with a good buying opportunity. This sell-off has erased all the gains GNRC stock made in the last month and gives the stock an upside of over 30%. 

Generac analyst rating on MarketBeat give the stock a consensus rating of Hold. However, in the last month, several analysts have boosted their price targets. That includes Truist which increased its price target for the stock to $160 on August 1, the day before earnings.  

That being said, we are at the peak of hurricane season. As is the case with home improvement stocks like Lowe’s Companies Inc. NYSE: LOW and The Home Depot, Inc. NYSE: HD, Generac would likely benefit if a major storm reminds consumers that there could be a cost of waiting.  

Otherwise, wait to see if the company’s earnings trend reverses, and that may not be until 2024.