Over the past six months, Generac’s stock price fell to $131.15. Shareholders have lost 8.4% of their capital, which is disappointing considering the S&P 500 has climbed by 1.5%. This might have investors contemplating their next move.
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Even with the cheaper entry price, we’re cautious about Generac. Here are three reasons why we avoid GNRC and a stock we’d rather own.
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.
We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched 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 3% over the last two years.
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Generac’s EPS grew at an unimpressive 7.8% compounded annual growth rate over the last five years, lower than its 14.3% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).
We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Generac’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.
We cheer for all companies making their customers lives easier, but in the case of Generac, we’ll be cheering from the sidelines. Following the recent decline, the stock trades at 16.2× forward price-to-earnings (or $131.15 per share). This valuation multiple is fair, but we don’t have much confidence in the company. There are better investments elsewhere. We’d suggest looking at one of Charlie Munger’s all-time favorite businesses.
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