Power Outage Trends Will Drive Strong Future Demand For Residential Generators

Key Takeaways

• Strong demand for residential products and innovations in standby generators are set to boost market leadership and long-term revenue growth.
  
• Enhanced margins from a favorable sales mix and cost reductions, alongside growing energy technology and dealer expansions, will support profitability.
  
• Revenue growth depends on unpredictable power outages and large projects, with competition, tariffs, and weak international demand posing additional challenges.

Catalysts

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

• Generac is experiencing strong demand for residential products, driven by increased sales of home standby and portable generators due to power outage trends. This is expected to boost revenue growth given the continuous rise in the demand for their products.
  
• Anticipated improvements in gross margins stemming from favorable sales mix and reduced input costs, even with potential new tariffs, are likely to help enhance net margins, thus improving overall profitability.
  
• The residential energy technology segment is poised for significant growth, particularly through expansions in ecobee and energy storage systems, expected to drive double-digit sales increases and potentially add substantially to revenue growth.
  
• Product innovation with the next-generation home standby generators focusing on improved technology and fuel efficiency is expected to maintain Generac’s market leadership, supporting long-term revenue growth and enhancing margins.
  
• Expansion in dealer networks and investments in marketing, dealer development, and consumer engagement strategies are aimed at increasing penetration and driving higher close rates, which should contribute significantly to future revenue and earnings growth as awareness and installations increase.

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 7.6% today to 10.3% in 3 years time.
• Analysts expect earnings to reach $529.8 million (and earnings per share of $9.06) by about March 2028, up from $325.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $633.0 million in earnings, and the most bearish expecting $385 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 23.1x on those 2028 earnings, down from 24.2x today. This future PE is lower than the current PE for the US Electrical industry at 23.3x.
• Analysts expect the number of shares outstanding to decline by 1.65% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.11%, as per the Simply Wall St company report.

Generac Holdings Future Earnings Per Share Growth

Risks

• Generac's revenue growth is heavily reliant on power outages, with their guidance assuming no major events in 2025. Without significant outages, there could be a negative impact on revenue and sales growth.
  
• The heightened competition within the energy technology market, combined with policy uncertainty, poses a risk to capturing sales and maintaining profitability margins in those segments.
  
• The impact of proposed tariffs could increase costs, potentially affecting net margins and leading to the need for price adjustments, which may impact sales volume if competitive landscapes shift.
  
• The C&I segments face challenges such as weaker demand from international markets and the airline industry, which could contribute to stagnation in revenue growth from these sectors.
  
• A significant portion of sales growth projections for energy technology solutions are linked to unpredictable large projects, adding uncertainty to revenue estimates in these areas.

Valuation

• The analysts have a consensus price target of $172.802 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 $94.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $5.1 billion, earnings will come to $529.8 million, and it would be trading on a PE ratio of 23.1x, assuming you use a discount rate of 8.1%.
• Given the current share price of $131.89, the analyst price target of $172.8 is 23.7% 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.