Trend: Generac (GNRC) profits from volatile weather and power outages. Many homes and businesses are buying electric generators to avoid being without electricity.
When I was in Highlands, NC, on the Friday after Thanksgiving, I noticed that a bank building had a Generac generator located beside air conditioning units. Highlands, at 4100 feet elevation, often gets winter storms with snow and high winds.
In late August 2011, hurricane Irene made landfall in the United States. Irene was also the first hurricane to make landfall anywhere along the U. S. East Coast from Florida to Maine since 2005. It was the first truly significant hurricane threat to the northeastern U.S. in two decades and, despite making final landfall there as a strong tropical storm, it was large in size and its impacts were severe in many highly-populated locations at the coast and inland from North Carolina to New England. High winds toppled trees onto power lines — electric power outages for up to a week were common from Virginia to Maine.
In early September, parts of the eastern U. S., some of which were also affected by Irene, were severely impacted by Tropical Storm Lee and its rainmaking remnants. Combining Lee with the inland impacts of Irene, 2011 was a stark reminder that tropical cyclones are not just coastal events and can cause very damaging and deadly flooding as a result of heavy rains. Heavy flooding caused electric power outages across the Southeast and Northeast.
In early December 2011, high winds hit Southern California. The National Weather Service called Southern California's winds a once-in-a-decade event. In the mountains, winds gusted up to 65 mph and 50 mph in the valleys. High wind warnings and advisories were also issued for Utah, Nevada, Wyoming, Arizona and New Mexico. The blustery weather eventually hit Oklahoma, Missouri and Indiana. The storms were the result of a dramatic difference in pressure between a strong, high-pressure system and a cold, low-pressure system, meteorologists said. This funnels strong winds down mountain canyons and slopes. The winds reached 123 mph at a ski resort northwest of Denver and topped 102 mph in Utah.
California, however, was the hardest hit, with more than 330,000 utility customers without power. The gusts were blamed for toppling semitrailers and causing trees to fall on homes, apartment complexes and cars. A state of emergency was declared in Los Angeles County, where schools in a dozen communities were closed. In some neighborhoods, concrete light poles cracked in half. Darkened traffic signals and fallen palm tree fronds and branches snarled traffic. At a Shell station, the roof collapsed into a heap of twisted metal.
Worries about instability in the electric power grid have motivated many homeowners and small business owners to invest in generators that start immediately when the power goes off. Generac's products are an excellent solution for this marketplace.
On Dec 7, 2011, Goldman Sachs upgraded Generac Holdings (NYSE: GNRC) from Neutral to Buy with a price target of $30, suggesting 17% upside. The firm sees consensus 2012 EPS being revised up 40%, structurally lower utility distribution investment to drive higher power disruptions, and value enhancing capital deployment. On the capital deployment, Goldman expects debt paydown equal to 20% of market cap over the next two years and a potential dividend.
Here's a 6-month chart as of Dec 7, 2011.
Note: We may own GNRC at any time.