July
15 -- Power outages are getting more common in US and Canada.
The
energy crisis has taken over the whole world and its adverse effects are
encompassing the residential and commercial sectors alike. According to the
estimates of U.S. Department of Energy, power cuts cost businesses an average
$80 billion loss per year. This has opened the gates for standby energy source
providers in the market to take advantage of this opportunity. The use of
standby power generators are growing more popular each day. Companies providing
such machinery are expected to experience exponential growth on the basis of
growing demand. The companies are expanding their operations outside the U.S.
so that they can cater a larger market. One company working on this principle
is Generac Holdings. Let’s see if
investors can trust the company’s growth expectations or not.
Generac’s
business outlook
Generac
is a manufacturer and marketer of generators and other engine-powered machinery
for residential, commercial and industrial markets. The company has a huge
market share in the residential sector holding a 70% share of the domestic home
standby market in the US. It has a huge distribution network of over 4800
dealers which acts as a competitive advantage and a barrier to entry for the
new players in the market. The company’s sales rocketed up to the $1 billion
mark for the first time in 2012, which was a 48% growth in sales from 2011.
Along with this, the company’s 3 year average income growth stands at a huge
29.4% compared to the industry average of just 3.5%. The cash flows of the
company increased from $105 in 2010 to $213 million in 2012.
Though
it is performing better than the industry, the company has a lower return on
equity and return on assets compared to rival Cummins. But it may not be too worrisome for Generac,
as Cummins has gone down with its revenues last year and its performance might
deteriorate more in coming future due to the strict regulations recently
introduced by the government on diesel engines. Briggs and Stratton on the
other hand is a large cap stable company with little or no growth expected in
near future. Thus it is unable to excite you with its margins or returns.
The
company’s main focus these days is the optional standby power supply for
markets, restaurants, healthcare institutions and telecom companies. This is
because of the huge losses these places incur when power is cut and there is no
secondary power source. Hospitals cannot
risk the life of patients by not keeping power generators. They are bound to
keep power generators for emergency purposes. Moreover, the company is also
considering working on a line of generators that use natural gas as the power
source. This decision might be fruitful as natural gas prices have declined and
demand for such products would be high.
Competitive
situation
As
mentioned above some of its peers are Briggs and Stratton and Cummins.
Cummins gives Generac a tough time in the residential market whereas Briggs is
present as a dominant force in the commercial sector. Moreover Cummins is not
just confined to power generation; it has a number of other operations.
Currently its diesel engine business is in a funk as the government has
conducted some serious changes in the regulations for diesel engine vehicles.
Cummins is currently working on Natural gas engines to take advantage from the
low natural gas prices in the country.
Briggs
on the other hand also has two segments i.e. engines and products. Most of its
sales and profits are attributed to the engines segment whereas its product
line of generators and power washers have reported losses since the past 3
years. Both these other companies have their primary focus on engines, but
Generac is focused on the production of power generators only. This gives the
company an advantage over its peers to increase its market share of the power
generators market. Furthermore, both Cummins and Briggs provide a decent yield
to their investors which Generac does not, but Generac does give out hefty
special dividends to its investors. In June 2012 the company paid a $6 per
share dividend which is huge compared to what you have to pay for the company’s
stock.
Recent
acquisition
In
the last quarter of 2012 the company made a strong move to enter international
markets by acquiring Ottomotores. Through this acquisition, the company would
take over the operations of Ottomotores Mexico and Ottomotores Brazil in
Curitiba. This would enable Generac to combine both companies which are
involved in the manufacturing and selling of diesel generators from 15 kW to
2.5 MW. Ottomotores is a leading company in Latin American standby power
industry. This would help the company to strengthen its grasp on the Latin
American market where its competitor Briggs & Stratton is already present.
Conclusion
Power
generators are an essential component for both residential and commercial users
alike. With the energy shortage in different countries increasing, the market
for these power generators is growing. Growing companies like Generac can make
full use of this opportunity due to its exceptional presence in the market over
more than 50 years and its strong profitability and cash flows indicating that
the company can take a few leaps of faith. Furthermore, its acquisition of
Ottomotores will help it to focus on its sales outside the US market and take
advantage of synergies.
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