It seems almost unfair, but adverse weather conditions and natural disasters can dominate business sectors and certain aspects of the financial markets. In particular, one focus would be on how houses get energy when the power grid is not operational. One such company is Generac Holdings Inc. (NYSE: GNRC).
Generac is suffering a swipe from two different blades in 2015. The first was from no serious hurricanes and tropical storms pounding the United States in 2015. The second was from the lack of cold weather and the lack of severe winter storms throughout the Eastern half of America this winter. Both are tied to El Niño.
The company is the number one independent maker of home power backup generators, but its reach is far wider: residential, commercial and industrial generators. Quite simply, Generac’s business thrives when there are storm-related power outages and infrastructure damage from natural disasters. After all, how many Americans like the thought of not having fans or air conditioning and refrigeration for food? And to think people might be unable to recharge their iPhone or Android phones.
The question to ask is whether the worst has been priced into Generac. After all, it makes power generators. These are in high demand when certain parts of the country suffer from power outages from storms. That can be from massive wind and debris damage knocking out power lines from hurricanes. Or it can come from massive power line damage from freezing weather weighing down the power lines to the point that they actually break or fall to the ground.
The real issue to consider is that 2015 is not the only year of disappointment for Generac shares. This stock was north of $60.00 in early 2014 and was closer to $45.00 at the end of 2014.
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The company has a market cap of roughly $2.05 billion, and Generac is valued at a mere 11 times expected earnings. Thomson Reuters has the consensus revenues at $1.31 billion for 2015 and $1.36 billion for 2016, down from $1.46 billion in 2014. Earnings per share are expected to be down roughly 10% in 2015 from the 2014 level.
What has happened here is that Generac’s revenues were up massively from 2012’s $1.17 billion to a level of $1.48 billion in 2013. And sales were only $1.46 billion in 2014.
Trying to outguess the earnings flow for a company like Generac may be more than difficult. It is obvious that the lack of weather events in 2015 has hurt its business. After all, the stock is down 40% from its highs earlier this year. It seems like perhaps at less than 11 times earnings maybe investors should not be surprised if the “E” portion of that P/E ratio is lower.
Analysts are still rather cautious on Generac. It appears that only a couple of analysts have made positive calls in the second half of 2015, and those were calls on valuation. The highest analyst target is only $39.00. And there are five analysts with neutral or negative ratings, although Merrill Lynch raised its Underperform (sell) rating to Neutral at the end of October.
Short sellers are fairly active in Generac. The lowest short interest of 2015 was about 12.5 million shares. Generac’s most recent short interest totaled about 13.5 million shares, with 15.2 days to cover, for the December 15 settlement date. The peak short interest was a year ago at 16.91 million.
Over half of Generac’s $1.84 billion in assets on the September 30 balance sheet are made up of goodwill and intangible assets and $654 million was the last balance for current assets (cash, receivables, inventories). Generac also has $1.05 billion in long-term debt and a total liability load of $1.35 billion, but only $225 million is in short-term liabilities.
Generac shares were last seen trading close to $30.50 on Wednesday, with a consensus analyst price target of $35.67 and a 52-week range of $26.33 to $50.77.
This is one of those classic value stock screens, but investors have to consider that most value stock screens can easily put investors into a value trap scenario. Also, some value stocks take years and years before that value is unlocked.
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