Weekly Equity Idea Highlight - 2020 07 06
Current market expectations for GNRC misunderstand the company's fundamentals. Markets expect UAFRS-based (Uniform) ROA (ROA') to trend downward going forward for the company when fundamentals are actually improving for the business.GNRC has a dominant 75% market share in its core generator market, and that market has only a modest penetration in its total addressable market relative to other “utility†appliances in a household, like air conditioning or even home security. On top of this, growing need for back-up power due to trends like more inclement weather, people wanting power redundancies as they spend more time at home, and growing interest in alternative power sources like off-grid solar, point to increasing tailwinds for the business.
The company's dominant positioning and strong macro tailwinds have led to strong Uniform
ROA above 25%, with steady double-digit growth rates historically. If the company can
continue this trend, there could be significant equity upside.
Also, management alignment and confidence in recent calls point to reasons to believe they can deliver on superior performance than what the market currently expects. Management is compensated to focus on increasing their penetration in their market through top-line sales growth compensation. Also, management showed confidence in their most recent call around shelter-in-place orders driving higher demand for their offerings. They were also confident about increased inclement weather driving demand.
Considering low market expectations, in terms of pessimism for both growth and Uniform
ROA, strong macro tailwinds, focused management, and confidence about the company
benefitting already from those macro factors, current low equity valuations appear unreasonable, spelling potential for equity upside.
Generac Holdings is a designer and manufacturer of a range of power generation equipment and other power products serving the residential, light commercial and industrial markets. The company's products include residential, commercial and industrial standby generators, as well as portable and mobile generators used in a range of applications. Other engine powered products that the company designs and manufactures include light towers which provide temporary lighting for various end markets; commercial and industrial mobile heaters and pumps used in the oil and gas, construction and other industrial markets; and a product line of outdoor power equipment for residential and commercial use.
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- GAAP and IFRS have failed to provide rules for reliable financial statement reporting
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