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Power generation products company Generac (NYSE:GNRC) reported results in line with analysts' expectations in Q2 CY2024, with revenue flat year on year at $998.2 million. It made a non-GAAP profit of $1.35 per share, improving from its profit of $0.70 per share in the same quarter last year.
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Generac (GNRC) Q2 CY2024 Highlights:
- Revenue: $998.2 million vs analyst estimates of $1 billion (small miss)
- Adj. EBITDA: $164.7 million vs analyst estimates of $149.7 million (10.0% beat)
- EPS (non-GAAP): $1.35 vs analyst estimates of $1.20 (12.3% beat)
- Full year guidance: "updating its full-year 2024 net sales guidance to 4 to 8% growth as compared to the prior year, an increase from the previous expectation of 3 to 7%"
- Gross Margin (GAAP): 37.6%, up from 32.8% in the same quarter last year
- Free Cash Flow of $49.71 million, down 41.6% from the previous quarter
- Market Capitalization: $9.43 billion
Renewable EnergyRenewable energy companies are buoyed by the secular trend of green energy that is upending traditional power generation. Those who innovate and evolve with this dynamic market can win share while those who continue to rely on legacy technologies can see diminishing demand, which includes headwinds from increasing regulation against “dirty” energy. Additionally, these companies are at the whim of economic cycles, as interest rates can impact the willingness to invest in renewable energy projects.
Sales GrowthA company's long-term performance is an indicator of its overall business quality. While any business can experience short-term success, top-performing ones enjoy sustained growth for multiple years. Over the last five years, Generac grew its sales at an excellent 13.5% compounded annual growth rate. This shows it expanded quickly, a useful starting point for our analysis.
Long-term growth is the most important, but within industrials, a half-decade historical view may miss new industry trends or demand cycles. Generac's recent history marks a sharp pivot from its five-year trend as its revenue has shown annualized declines of 4.8% over the last two years. Generac isn't alone in its struggles as the Renewable Energy industry experienced a cyclical downturn, with many similar businesses seeing lower sales at this time.
We can better understand the company's revenue dynamics by analyzing its most important segments, Residential and Commercial and Industrial, which are 53.9% and 34.5% of revenue. Over the last two years, Generac's Residential revenue (sales to consumers) averaged 12.9% year-on-year declines. On the other hand, its Commercial and Industrial revenue (sales to contractors and pros) averaged 14.2% growth.
This quarter, Generac's $998.2 million of revenue was flat year on year and in line with Wall Street's estimates. Looking ahead, Wall Street expects sales to grow 10.1% over the next 12 months, an acceleration from this quarter.
Operating MarginOperating margin is an important measure of profitability as it shows the portion of revenue left after accounting for all core expenses–everything from the cost of goods sold to advertising and wages. It's also useful for comparing profitability across companies with different levels of debt and tax rates because it excludes interest and taxes.
Generac has been an optimally-run company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 14.2%. This result isn't too surprising as its gross margin gives it a favorable starting point.
Analyzing the trend in its profitability, Generac's annual operating margin decreased by 5.8 percentage points over the last five years. Even though its margin is still high, shareholders will want to see Generac become more profitable in the future.
In Q2, Generac generated an operating profit margin of 10.3%, up 1.7 percentage points year on year. Since its gross margin expanded more than its operating margin, we can infer that leverage on its cost of sales was the primary driver behind the recently higher efficiency.
EPSAnalyzing long-term revenue trends tells us about a company's historical growth, but the long-term change in its earnings per share (EPS) points to the profitability of that growth–for example, a company could inflate its sales through excessive spending on advertising and promotions.
Generac's EPS grew at a weak 1.2% compounded annual growth rate over the last five years, lower than its 13.5% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded.
We can take a deeper look into Generac's earnings to better understand the drivers of its performance. As we mentioned earlier, Generac's operating margin improved this quarter but declined by 5.8 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; taxes and interest expenses can also affect EPS but don't tell us as much about a company's fundamentals.
Like with revenue, we also analyze EPS over a more recent period because it can give insight into an emerging theme or development for the business. For Generac, its two-year annual EPS declines of 25.6% show its recent history was to blame for its underperformance over the last five years. These results were bad no matter how you slice the data.
In Q2, Generac reported EPS at $1.35, up from $0.70 in the same quarter last year. This print easily cleared analysts' estimates, and shareholders should be content with the results. Over the next 12 months, Wall Street expects Generac to grow its earnings. Analysts are projecting its EPS of $4.28 in the last year to climb by 70.4% to $7.30.
Key Takeaways from Generac's Q2 Results It was good to see Generac beat analysts' adjusted EBITDA and EPS expectations this quarter. The company also raised its full year revenue growth guidance, citing Hurricane Beryl. Zooming out, we think this was a decent quarter, showing the company is staying on target. The stock remained flat at $157 immediately after reporting.
