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Why Is Generac Holdings (GNRC) Down 11% Since Last Earnings Report?

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  • GNRC

It has been about a month since the last earnings report for Generac Holdings (GNRC). Shares have lost about 11% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is Generac Holdings due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

Generac Q3 Earnings Miss Estimates, Revenues Up Y/Y

Generac reported impressive third-quarter 2021 results, wherein earnings and revenues increased on a year-over-year basis. However, both the bottom line and top line missed their respective Zacks Consensus Estimate. Healthy operational momentum, robust demand for Residential and C&I products across various end markets, continued capacity-expansion efforts, and effective M&A strategies boosted the performance.

Net Income

On a GAAP basis, net income in the September quarter was $131.6 million or $1.93 per share compared with $115 million or $1.82 per share in the prior-year quarter. The improvement was primarily attributable to top-line expansion.

Quarterly adjusted net income was a record $151.1 million or $2.35 per share compared with $132.9 million or $2.08 per share in the year-ago quarter. The bottom line, however, missed the Zacks Consensus Estimate by 4 cents.

Revenues

Thanks to the solid demand environment and robust operational execution with an increased backlog, quarterly revenues came in at an all-time high of $942.7 million compared with $701.4 million in the year-ago quarter. The 34.4% jump was primarily driven by broad-based growth across Domestic and International segments together with higher demand for Residential and C&I products. However, the top line lagged the consensus mark of $960 million.

Generac continues to witness unprecedented demand for PWRcell energy storage systems. Despite challenging scenarios stemming from the pandemic, Generac achieved record production levels on the back of solid global demand for C&I products among telecom national account customers. Its enhanced Energy Technology solutions portfolio played a major role as well.

Generac continues to propel its ‘Powering a Smarter World’ strategy as it solidifies its position as an energy technology solutions company. With additional capacity investments for home standby generators and other products along with overall stronger outlook for domestic and international markets, Generac anticipates witnessing an accelerated momentum in 2022. It expects to boost its top line in the long run with effective pricing and cost-reduction actions.

Segment-wise, Domestic revenues increased 30.3% year over year to $790.8 million, driven by the impact of acquisitions that accounted for nearly 1% of the revenue growth. Higher demand for home standby generators, PWRcell energy storage systems coupled with strength across both residential and C&I products acted as key drivers for core sales growth. International revenues rose 60.8% to $151.9 million, driven by a rebound in end-market activity, primarily in the European and Latin American regions post the COVID-19 lows last year. The impact of acquisitions and forex accounted for nearly 29% of revenue growth.

Product-wise, revenues from Residential soared 32.7% to $608.8 million. Revenues from C&I were $258.3 million, up from $176.2 million in the year-ago quarter. Revenues from Other product class came in at $75.6 million, up 14%.

Other Details

Costs of goods sold rallied 42.7% year over year to $606.7 million. Gross profit was $336 million, up from $276.1 million with respective margins of 35.6% and 39.4%. The gross profit margin declined as a result of higher input costs related to logistics, labor, raw materials together with escalating plant start-up costs.

Total operating expenses were $162.4 million compared with $120.5 million in the prior-year quarter. This was due to higher variable expenses from an increase in sales volumes, a rise in employee costs, and the impact of acquisitions. Operating income came in at $173.6 million, up 11.5%. Adjusted EBITDA was $209.2 million compared with $178.8 million in the year-ago quarter, driven by significant revenue growth.

Cash Flow & Liquidity

In the first nine months of 2021, the company generated $349.4 million of net cash from operating activities compared with $268.3 million in the prior-year period. Supported by a healthy liquidity position, free cash flow for the same period came in at $264.2 million compared with $236.4 million a year ago. As of Sep 30, 2021, the company had $423.7 million in cash and cash equivalents with $843.4 million of long-term borrowings and finance lease obligations.

2021 Outlook Updated

For 2021, Generac expects revenue growth between 47% and 50% year over year, same as prior guidance. Although the company continues to experience a robust demand environment, rising input costs, higher logistics, and supply chain issues are expected to strain its margins. As a result, net income margin (before deducting for non-controlling interests) is expected to be about 15% compared with the previous outlook of 15.5-16%. Adjusted EBITDA margin is estimated to be nearly 23.5% compared with the previously anticipated range of 24.5-25%.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. The consensus estimate has shifted -15.47% due to these changes.

VGM Scores

Currently, Generac Holdings has an average Growth Score of C, though it is lagging a bit on the Momentum Score front with a D. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, Generac Holdings has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.


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