Extreme weather events are intensifying in the U.S., with 2023 setting a new record for billion-dollar disasters. This escalation is driven by climate change and leads to increased demand for Generac’s emergency power solutions, boosting their profitability. In today’s FA Alpha Daily, let us explore Generac’s financial performance and how it reflects the demand for its offerings.
FA Alpha Daily:
Tuesday Company Specific
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Extreme weather events in the United States are on the rise due to a combination of natural climate variability and human-induced climate change.
In 2023, the U.S. experienced a significant increase in extreme weather events, setting a new record for the number of billion-dollar weather and climate disasters.
From January to August, the U.S. endured 23 such disasters, surpassing the previous annual record of 22 set in 2020. This included 18 severe storms, two flooding events, one tropical cyclone, one wildfire, and one winter storm.
Notable events were the deadliest U.S. wildfire in over a century on Maui and Hurricane Idalia’s landfall in Florida.
This escalation in extreme weather events indicates the broader impacts of climate change, with increasing temperatures contributing to more severe and frequent weather phenomena.
However, despite the destruction caused by these extreme weather events, some companies are bound to benefit.
This is where Generac (GNRC) comes in.
Generac specializes in the design and manufacture of power generation equipment and other engine-powered products.
They are best known for their range of standby and portable generators for residential, commercial, and industrial use, providing reliable power solutions during outages and emergencies.
As extreme weather events like hurricanes, wildfires, and severe storms become more frequent, leading to power outages, the need for reliable emergency power solutions escalates.
Generac’s range of standby generators, particularly for residential and commercial use, becomes essential for ensuring uninterrupted power.
For instance, in areas prone to hurricanes or floods, homeowners and businesses increasingly invest in backup generators to maintain power during and after such events, directly boosting Generac’s sales of these power-critical products.
The escalation in extreme weather events has directly led to high profitability for Generac. Over the last five years, Generac’s Uniform return on assets (“ROA”) has averaged 36%.
The chart shows that the company performed incredibly well during a time of increasing extreme weather events. As these events continue, Generac should continue performing well.
And yet, the market fails to recognize this opportunity.
We can see this through our Embedded Expectations Analysis (“EEA”) framework.
The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.
In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.
At the current stock price, the market expects the company’s ROA to fall to 15%, assuming the demand will collapse.
Given the growing cases of extreme weather events and the company’s essential position in supplying power to affected people, these expectations seem overly pessimistic.
Generac has substantial potential to scale its operations and continue benefiting from these continuous extreme weather events.
That is why Generac showed up on our screen. The company makes a great FA Alpha 50 name due to its potential for high returns and low expectations from the market.
Throughout financial market history, many of the world’s most successful investors have been candid in their belief that Generally Accepted Accounting Principles (“GAAP”) distort economic reality.
Warren Buffett, for example, once said investors should “concentrate on the world of companies, not arcane accounting mathematics.”
Investors who neglect the very real issues with as-reported accounting can find themselves caught up in investing with the crowd, blindly following hot “themes” without a thorough grasp of how to understand the businesses in question.
The only true way to focus on the “world of companies,” as Buffett suggests investors do, is to present a clear picture of how a business operates, something that can only be done by adjusting financial statements to reflect the arbitrary nature of certain accounting rules that leave much to discretion.
The world’s best investors understand the need to make these adjustments, which allows them to focus not on picking out the most popular companies but rather on looking for great names in sleepy areas that the market isn’t paying much attention to. From there, the goal is to then identify quality companies with significant growth potential at reasonable prices.
That’s exactly what we’ve set out to do with the FA Alpha, our monthly list of 50 companies that rank at the top for quality, high growth, and low valuations.
This list has outperformed the market by 300 basis points per year for over 20 years now, effectively doubling the performance of the market by focusing on the real fundamentals and valuations of companies with our proprietary Uniform Accounting framework.
See for yourself below.
To see the other 49 names on the list, click here.
Joel Litman & Rob Spivey
Chief Investment Strategist &
Director of Research
at Valens Research
Today’s highlight, Generac Holdings Inc. (GNRC) is one of the top stock picks from FA Alpha 50 this month. To see more stock picks like this, become an FA Alpha and get access to FA Alpha 50.