Generac stock rocked after profit warning due to weakness in home generator business

The stock
GNRC,
-25.52%
plummeted 24.8% in afternoon trading, putting it on track for the lowest close since June 2020 and the biggest one-day decline by far since going public in February 2010. The next-biggest selloff was 14.0% on Aug. 6, 2015.

Trading volume swelled to 10.1 million shares, or nearly six times the full-day average of about 1.8 million shares.

Generac reported preliminary third-quarter results before the opening bell, saying net income fell to approximately $58 million, or 83 cents a share, from $132 million, or $1.93 a share, in the same period a year ago.

Excluding nonrecurring items — such as charges related to warranties for clean-energy products and bad-debt expenses connected to a clean-energy-product customer that filed for bankruptcy — adjusted earnings per share were about $1.75, or nearly half the FactSet consensus of $3.22.

Sales grew 15% to about $1.09 billion, which was below the FactSet consensus of $1.34 billion.

“While shipments of Commercial & Industrial products performed as expected, Residential product sales were pressured during the quarter,” said Generac CEO Aaron Jagdfeld.

He said that installation capacity for home standby (HSB) generators continued to grow but was still behind production output during the quarter: “This has resulted in higher field inventory levels and lower home standby generator orders from our channel partners than previously expected even as end customer demand continues to be strong driven by elevated power outages, most notably from Hurricane Ian.”

To make matters worse, Jagdfeld said shipments of clean-energy products were hurt by a large customer that ceased operations and has since filed for bankruptcy.

On its website, that customer, Pink Energy, said it was forced to close its doors permanently “due to rampant consumer discontent resulting from faulty Generac solar equipment.”

For 2022, Generac lowered its guidance range for sales growth to 22-24% from 36-40%. It also cut its outlook for net-income margin to 9-10% from 13-14%.

The company said it will report full third-quarter results on Nov. 2 before the market opens. Given that installation has lagged behind production, investors should keep an eye out for what the company says about its inventories.

In the second quarter, inventory rose 13.8% year-over-year to $1.24 billion, after growing 13.4% in the first quarter.

KeyBanc’s Hammond downgraded Generac to sector weight, after being at overweight since June 2021. He removed his stock-price target of $325.

“While we are normally not reactive to well-telegraphed news, we are increasingly concerned about the magnitude of a HSB reset into 2023, and believe the Pink Energy relationship/bankruptcy puts a cap on investor sentiment and fundamental momentum as it relates to [Generac’s] Clean Energy growth story,” Hammond wrote in a note to clients.

Hammond said he would “revisit” the bullish thesis once he is more comfortable that HSB fundamentals have reset and credibility on the clean-energy side has been restored.

Cowen analyst Jeffrey Osborne cut his stock-price target down to $179 from $229, saying he didn’t appreciate the magnitude of the inventory buildup. He believes the installation problems are likely to persist into the first quarter of 2023, but he kept his rating at buy, because he believes the problems will get Wall Street’s profit and revenue projections to stabilize.

“While the preannouncement is a significant disappointment in the near-term and puts management’s poor track record of visibility into the dealer channel more in focus, we believe the announcement will level set sell-side estimates, which we thought were too high, and significantly derisks the 2023 guidance announcement expected with 4Q22 results,” Osborne wrote.

Generac stock has plunged 68.4% year to date, while the S&P 500 index
SPX,
-0.84%
has dropped 22.6%.