April
30 -- For most companies, tough weather conditions are always a negative. In
the power-generator industry, though, companies like Generac Holdings have often thrived
when bad storms bring power lines down and leave millions of residents without
electricity from the grid. Still, coming into Thursday morning's first-quarter
financial report, Generac investors were nervous about the fact that despite the
cold winter, relatively few storm events had a major impact on the grid. As it
turned out, Generac's quarter did fall short of what most investors had
expected, but other factors that many wouldn't have thought of played a role in
holding back the generator maker's results. Let's look more closely at
Generac's latest results and what they mean for its future.
Generac's
first-quarter performance reflected a considerable slowdown for the generator
specialist. Revenue of $311.8 million was down almost 9% from year-ago levels,
which was considerably worse than the 5% sales decline that most of those
following the stock were looking to see. The impact on earnings was even more
severe, with adjusted net income falling by about a third and earnings per
share of $0.49 falling 20% below the consensus estimate among shareholders.
Neither of Generac's two major product lines performed well. The
Commercial and Industrial division suffered the larger decline in revenue, with
sales dropping 15% as Generac cited a decline in shipments to its customers in
two key industries. Yet sales were also sluggish on the residential side, with
revenue falling more than 4% on weaker than expected levels of power outages
across its geographical market. In addition, tough winter conditions hampered
installation efforts for many residential customers, slowing the rate of
natural demand for the market.
Other factors also hit Generac. Gross margins fell 2 percentage
points to 32.9%, with Generac having to absorb some costs due to the slowdown
in key ports on the West Coast. Increased marketing and advertising expenses
pushed operating expenses up more than 6% from the year-ago quarter.
CEO Aaron Jagdfeld took a long-term view on responding to the
tough conditions. "The rapid decline in oil and gas related
investment," Jagdfeld said, "coupled with continued softness in
capital spending in the telecom sector had a negative impact on our [commercial
and industrial] product shipments during the quarter." Jagdfeld noted the
challenges of having multiple end markets perform badly at the same time.
Even
with the winter having fallen short of expectations, Generac thinks that times
will get better. As Jagdfeld put it, "Despite a softer demand environment
in the near term, we remain focused on driving awareness for our products,
expanding and developing out distribution, launching innovative new products,
and controlling costs."
Still, improvement will take time, and the poor start to the
year led Generac to cut its guidance for 2015. Generac now expects roughly flat
sales for the year, even under the assumption that a slow power-outage
environment in the first half of 2015 will give way to more typical conditions
later in the year. Adjusted operating earnings are also likely to see growth
disappear for the year, according to the company.
The good news, though, is that Generac has left itself far
better diversified than it was in the past. With solid exposure to both
industrial and residential applications, Generac isn't entirely vulnerable to
the vagaries of the weather.
Still, investors were unhappy with Generac's results, sending
the stock plunging 8% in the first two hours of pre-market trading following
the announcement. Without the storm-driven demand that Generac has had in
several past years, the company will have to prove to shareholders that it can
keep growing even when Mother Nature doesn't make the need for its products
eminently clear.
Dan Caplinger www.fool.com
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