Next-generation Standby And Data Center Generators Will Secure Future Position

Key Takeaways

• Generac's next-gen home standby generators and California market expansion could significantly boost revenue and maintain market share.
  
• Ecobee's smart thermostat success and large diesel generator shipments offer strong growth opportunities in residential and data center segments.
  
• Economic uncertainty and higher tariffs could pressure margins and revenue due to reduced shipments, higher costs, and softer international markets.

Catalysts

Designs, manufactures, and distributes energy technology products and solution worldwide.

• The launch of Generac's next-generation home standby generator lineup scheduled for the second half of 2025 is expected to drive future revenue growth. These generators will offer improved fuel efficiency, quieter operation, and a lower total cost of ownership, which could bolster demand and help maintain or increase market share.
  
• The expansion and development of the home standby generator market in California hold significant potential for revenue growth, given its current penetration is under 2%. With enhanced marketing and distribution efforts, this underdeveloped market could provide substantial sales growth as power outages increase.
  
• The successful performance and market expansion of ecobee, including the introduction of a lower-cost smart thermostat and growth in connected homes, are likely to support revenue and earnings growth. Ecobee's profitability in 2025 and expanding market share could contribute positively to the company's financial performance.
  
• The anticipated growth in shipments of large megawatt diesel generators for data centers represents a long-term growth opportunity. This expansion into new market segments, combined with Generac's ability to offer more competitive lead times, could lead to increased revenues and capture of market share.
  
• Initiatives aimed at optimizing the supply chain and cost structure in response to tariff impacts are expected to preserve or improve net margins. These initiatives, alongside strategic price increases, are anticipated to counteract increased product costs, maintaining EBITDA margins within the guided range.

Generac Holdings Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Generac Holdings's revenue will grow by 6.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 7.9% today to 10.4% in 3 years time.
• Analysts expect earnings to reach $543.4 million (and earnings per share of $9.41) by about May 2028, up from $342.9 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as $412 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 19.4x on those 2028 earnings, down from 19.7x today. This future PE is lower than the current PE for the US Electrical industry at 21.9x.
• Analysts expect the number of shares outstanding to decline by 2.53% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.14%, as per the Simply Wall St company report.

Generac Holdings Future Earnings Per Share Growth

Risks

• Economic uncertainty and potential tariff impacts could dampen consumer spending and lead to reduced residential product shipments, which may affect revenue and earnings.
  
• The anticipated $125 million increase in product costs due to higher tariffs could pressure net margins if not fully offset by price increases and cost reduction initiatives.
  
• Tariff levels on Chinese imports and potential changes in trade policy introduce wider ranges of financial outcomes, which could impact revenue and earnings projections.
  
• The softness in certain international commercial and industrial (C&I) markets and the reduction in capital spending from rental equipment customers could negatively affect C&I product sales, impacting overall revenue growth.
  
• Potential demand destruction from higher prices in the consumer market, especially if outages do not occur at expected levels, could lower residential sales revenue.

Valuation

• The analysts have a consensus price target of $154.148 for Generac Holdings based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $205.0, and the most bearish reporting a price target of just $95.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.2 billion, earnings will come to $543.4 million, and it would be trading on a PE ratio of 19.4x, assuming you use a discount rate of 8.1%.
  
• Given the current share price of $113.75, the analyst price target of $154.15 is 26.2% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.