Power generation products company Generac (NYSE:GNRC) reported Q3 CY2024 results exceeding the market’s revenue expectations, with sales up 9.6% year on year to $1.17 billion. Its non-GAAP profit of $2.25 per share was also 15.5% above analysts’ consensus estimates.

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“Our third quarter results outperformed our expectations as elevated power outage activity drove increased shipments of our residential products and strong execution helped to deliver significant margin expansion,” said Aaron Jagdfeld, President and Chief Executive Officer.

Company Overview

With its name deriving from a combination of “generating” and “AC”, Generac (NYSE:GNRC) offers generators and other power products for residential, industrial, and commercial use.

Renewable Energy

Renewable energy companies are buoyed by the secular trend of green energy that is upending traditional power generation. Those who innovate and evolve with this dynamic market can win share while those who continue to rely on legacy technologies can see diminishing demand, which includes headwinds from increasing regulation against “dirty” energy. Additionally, these companies are at the whim of economic cycles, as interest rates can impact the willingness to invest in renewable energy projects.

Sales Growth

Examining a company’s long-term performance can provide clues about its business quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul. Thankfully, Generac’s 13.6% annualized revenue growth over the last five years was exceptional. This is a useful starting point for our analysis.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Generac’s recent history marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 5.1% over the last two years. Generac isn’t alone in its struggles as the Renewable Energy industry experienced a cyclical downturn, with many similar businesses seeing lower sales at this time.

Generac also breaks out the revenue for its most important segments, Residential and Commercial and Industrial, which are 61.6% and 27.9% of revenue. Over the last two years, Generac’s Residential revenue (sales to consumers) averaged 10.6% year-on-year declines. On the other hand, its Commercial and Industrial revenue (sales to contractors and pros) averaged 9.8% growth.

This quarter, Generac reported year-on-year revenue growth of 9.6%, and its $1.17 billion of revenue exceeded Wall Street’s estimates by 1%.

Looking ahead, sell-side analysts expect revenue to grow 12.9% over the next 12 months, an improvement versus the last two years. This projection is healthy and indicates the market thinks its newer products and services will fuel higher growth rates.

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Operating Margin

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling them, and, most importantly, keeping them relevant through research and development.

Generac has been an optimally-run company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 14.1%. This result isn’t too surprising as its gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Generac’s annual operating margin decreased by 5.9 percentage points over the last five years. Even though its margin is still high, shareholders will want to see Generac become more profitable in the future.

This quarter, Generac generated an operating profit margin of 14.4%, up 4.6 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.

Earnings Per Share

Analyzing revenue trends tells us about a company’s historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Generac’s EPS grew at an unimpressive 5.6% compounded annual growth rate over the last five years, lower than its 13.6% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.

Diving into the nuances of Generac’s earnings can give us a better understanding of its performance. As we mentioned earlier, Generac’s operating margin improved this quarter but declined by 5.9 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business.

In Q3, Generac reported EPS at $2.25, up from $1.64 in the same quarter last year. This print easily cleared analysts’ estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Generac’s full-year EPS of $6.49 to grow by 24.7%.

Key Takeaways from Generac’s Q3 Results

We were impressed by how significantly Generac blew past analysts’ EBITDA expectations this quarter. We were also excited its EPS outperformed Wall Street’s estimates. Generac also slightly raised its full year revenue and EPS guidance. Overall, we think this was a decent quarter with some key metrics above expectations. Expectations could have been even higher, as shares traded down 1.3% to $162.81 immediately following the results.

So do we think Generac is an attractive buy at the current price? The latest quarter does matter, but not nearly as much as longer-term fundamentals and valuation, when deciding if the stock is a buy. We cover that in our actionable full research report which you can read here, it’s free.