Wednesday was a dark day for investors in Generac Holdings (GNRC 1.75%) stock, which plummeted 24.4% after the backup-power generator and energy technology company released its second-quarter 2023 report.
The stock's plunge is attributable to the quarter's earnings missing Wall Street's consensus estimate and management lowering its full-year 2023 guidance. The latter factor was probably the main catalyst for the drop, as most investors focus more on a company's prospects than its past results.
Generac's key numbers
|
Metric |
Q2 2022 |
Q2 2023 |
Change YOY |
|---|---|---|---|
|
Revenue |
$1.29 billion | $1 billion | (23%) |
|
GAAP net income |
$156 million | $45 million | (71%) |
|
Adjusted net income | $185 million | $68 million | (63%) |
|
GAAP earnings per share (EPS) | $2.21 | $0.70 | (68%) |
|
Adjusted EPS | $2.86 | $1.08 | (62%) |
Data source: Generac. GAAP = generally accepted accounting principles. YOY = year over year.
Core sales, which exclude the impact of acquisitions and foreign-currency exchange, fell 26%.
Wall Street was looking for adjusted EPS of $1.15 on revenue of $977.2 million, so the company missed the profit expectation and beat the top-line one.
The company generated cash of $83 million running its operations during the quarter, up from $24 million in the year-ago period. Free cash flow (FCF) was $54 million, up from $6 million in the year-ago period. The company attributed the increase in free cash flow primarily to "significantly lower working capital investment ... partially offset by lower operating earnings, higher interest payments, and higher capital expenditures."
Generac ended the quarter with cash and cash equivalents of $193 million and about $1.5 billion in long-term debt.
NYSE: GNRC
Key Data Points
Sales breakdown by product class and geography
Product class:
- Residential product sales decreased 44% year over year to $499 million.
- Commercial and industrial (C&I) product sales grew 24% to $384 million. (Generac also has a relatively small "other" category.)
Geographic segment:
- Domestic sales declined 28% year over year to $815.3 million, with acquisitions made over the last year contributing about 3% to growth.
- International sales (which consist primarily of commercial and industrial products) grew 10% to $223.7 million, driven by strength across most regions. Core growth was about 6%. (Both categories include intersegment sales, so their total is somewhat higher than the company's total revenue.
What the CEO had to say
Here's most of CEO Aaron Jagdfeld's statement in the earnings release:
As expected, overall second quarter sales declined from a strong prior year comparable period that included the significant benefit of excess backlog reduction for home standby generators. While leading indicators of end market demand remain strong and we continue to make progress in reducing field inventory levels, residential product sales were modestly lower than our expectations in the quarter as a softer consumer environment for home improvement impacted shipments of home standby generators and [lawn] chore products. However, global C&I product shipments remained strong at all-time record levels and were better than expected with broad-based growth across nearly all regions and channels.
2023 guidance lowered
Management attributed the paring back of its annual guidance for revenue and the key profitability metric for which it guides to the "softer-than-expected consumer environment."
In the plus column, the company now expects C&I product sales to grow at a mid-teens percentage rate, up from its prior expectation of a mid- to high-single-digit increase. This better-than-expected C&I outlook partially offset the worse-than-anticipated residential outlook.
Cash flow is still expected to be strong, which is a bright spot that investors shouldn't overlook.
|
Metric |
Prior 2023 Guidance |
Current 2023 Guidance |
|---|---|---|
|
Revenue growth relative to 2022 | (10%) to (6%) | (12%) to (10%) |
| Net income margin before deducting for noncontrolling interests | 7.5% to 8.5% | 6% to 7% (This metric was 8.75% in 2022.) |
| Operating and free cash flow | "Expected to return to strong levels ... with conversion of net income to free cash flow expected to be well over 100%." | Same as prior guidance. |
Data source: Generac.
A dim quarter, but long-term growth drivers remain
Reiterating my conclusion from the prior-quarter's earnings article:
The company's long-term growth potential remains robust. Demand for its backup power products should continue to get a boost from the increasing number of climate change-driven extreme weather events. And its energy technology solutions provide it with the potential to benefit from the next generation of the electric grid.
