The Doubt and Opportunity of Generac

November 6, 2012 by Jon C. Ogg

Generac Holdings Inc. (NYSE: GNRC) is seeing interest in its shares yet again. The company has been a keen beneficiary of the trends for generator demand due to Hurricane Sandy knocking out much of the power infrastructure in New Jersey, New York and elsewhere in the Northeast. And now a nor’easter storm is approaching the same area.

Usually the big pop from weather and disaster related events is short-lived. This stock has run up too much based on historical logic, but there are some things that will benefit it ahead as well. Trading volume became elevated in the days before the storm once it became clear that New Jersey and New York City were going to be hit by it.

On October 24, shares were at $26.67 and they closed at $28.33 on Friday, October 26. When the market reopened on Wednesday, October 31, the stock closed up at $34.00, and after two days of fighting around that $34.00 level, the most recent close is $38.60.

The question is what happens now after such a run. Generac has a market cap of $2.6 billion. There is talk that gas stations will soon have to have some form of gas-powered back-up power generators ahead, and the reality is that this only makes sense. What good is having gasoline in the ground if you cannot get it out because the power is out? The same is being said for broadband stations and cellphone towers. Again, that makes sense.

Barron’s noted over the weekend:

Given the recent run-up, investors might not want to chase the stock, since it has tended to dip in the past after rising sharply on natural disasters. Even so, Generac’s valuation isn’t extreme; its shares trade for about 11 times estimated 2012 profits of $2.95 to $3 a share.

It is easy to expect that guidance will be great from this company. Generac has a huge nationwide opportunity ahead of it. Unfortunately, a run of about 45% based on the storm is something that we would be cautious on. That being said, when the investment community gets behind a trend, it can run, and run far beyond logic.

JON C. OGG

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