Bear of the Day: Generac (GNRC)

Core Insights - Generac Holdings (GNRC) is a leading manufacturer of power generation equipment, focusing on backup power solutions due to rising demand from outages, data centers, and electrification trends [1] Revenue Segments - In 2024, Generac's revenue reached $4.3 billion, with Residential products contributing 56-57% ($2.4 billion), Commercial & Industrial (C&I) at 32% ($1.4 billion), and Other products/services at 11% [2] - Domestic sales account for 84% of total sales, while international sales make up 16% [2] - The trailing twelve months (TTM) revenue through mid-2025 stands at $4.41 billion, but fiscal year 2025 revenues are projected to remain flat near $4.3 billion [2] Growth Rates - Revenue grew by 6.8% in 2024 after an 11.9% decline in 2023, with TTM growth at 9.7% [3] - Residential products averaged 9.5% year-over-year growth over two years, while C&I experienced a 2.2% decline [3] - Analysts project a 7.7% revenue growth over the next year, with flat sales expected in 2025 amid weak outages [3] - Earnings per share (EPS) is expected to rise by 15.8% to $7.54, but the Zacks consensus for 2025 projects EPS at $6.61, indicating a 9% annual drop [3] Q3 Report Displays the Weakness - In Q3 2025, Generac reported adjusted EPS of $1.83, missing the Zacks Consensus Estimate of $2.25 by 18% [4] - Net sales were $1.11 billion, down 5% from $1.17 billion in the prior-year quarter, also missing the consensus estimate of $1.2 billion [4] Demand and Backlog - Management views data center power as a "generational opportunity," with potential to double C&I sales over the next three to five years due to hyperscale and AI-driven capacity build-out [8] - The order backlog for large megawatt generators has roughly doubled in recent quarters, although fewer power outages have kept sales flat in 2025 [8][9] Adjusted Expectations - Due to a weak power outage environment, management has revised its expectations for 2025, now forecasting flat revenues compared to earlier guidance of a 2-5% increase [6] - Net income margin is now expected to be 6%, down from the previous guidance of 7.5-8.5% [7] - Adjusted EBITDA margin is estimated at 17%, compared to the previous range of 18% to 19% [7] - Free cash flow conversion from adjusted net income is now expected to be 80%, down from the previous guidance of 90% to 100% [7] Customers, Partners, and Competition - Key customers include residential homeowners and C&I clients like data centers [10] - Generac has acquired a manufacturing site in Sussex, WI, to expand C&I production, which is crucial for long-term growth [11] - Bloom Energy (BE) is emerging as a competitor with its solid oxide fuel cells targeting data centers, posing indirect competition to Generac's combustion generators [12][14]