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Generac Holdings Inc. Strong Third-Quarter Results; Management Raises Guidance

Generac reported strong third-quarter revenue and adjusted EPS, which were both ahead of consensus expectations. Management also raised guidance, driven primarily by power outages caused by Hurricane Sandy. Specifically, management now forecasts total revenue to increase in the low-40% range for full year 2012, compared with previous guidance for growth in the low-30% range. The new revenue guidance was well above consensus expectations (at the time of the release) for revenue growth of about 33%. Adjusted EBITDA in 2012 is now expected to increase in the mid-40% range, compared with previous expectations for EBITDA growth in the mid-30% range

The stock closed up 20% today, given the increase in guidance for 2012 and the likelihood that demand created by the hurricane carries over into 2013. Historically, a large awareness event like Hurricane Sandy will generate strong portable sales directly before and after the event. Over the following several quarters, Generac typically sees increased demand for its higher-margin flagship product, the home standby generator, because many families and businesses decide to essentially eliminate the possibility of future power loss.

We now forecast the company to generate free cash flow of $172 million in 2012 (up from $158 million in 2011). This represents a free cash flow yield of 7.5% based on today’s closing price. We believe Generac will use free cash flow to pay down debt, which was $883 million at the end of the third quarter (debt-to-equity ratio of 67%). Generac recently refinanced its senior credit facility and used the available proceeds to pay a special cash dividend of $6.00 per share (amounting to about $408 million) on June 29, 2012. Awareness events such as Hurricane Sandy allow the company to generate significant amounts of cash, which can be used to pay down debt associated with the special cash dividend.

Although the stock will likely continue to carry momentum in the near term, we are maintaining a Market Perform rating based primarily on valuation. Generac is trading at 11.0 times our 2013 EBITDA estimate of $254 million, above the historical multiple of 10.2 times. In our opinion, sustained price appreciation over the next 12 months would require significant upward revisions to revenue growth. It is important to note that we do not incorporate unforeseen “weather events” into our 2013 forecast. Even one major event such as another hurricane could materially affect our current estimates

Generac Holdings is a leading provider of residential, commercial, and industrial generators. The company’s residential business offers portable and residential standby generator systems sold through dozens of retailers (including Home Depot and Lowe’s) and thousands of contractors. Generac’s natural gas, gasoline, and diesel-based generators are also used as a backup electricity source in commercial/industrial applications, including gas stations, restaurants, cellular towers, hospitals, and manufacturing plants

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