SID 0029 Generac (GNRC) Part 4

When we first examined the home standby generator market, we were struck by what seems to be a unanimity of opinion that tremendous secular growth would be driven by homeowners increasingly discovering the benefits of having an automated system to supply electric power in times of outages.  It’s argued that penetration is low, and that loss of power is not only inconvenient, but uneconomic, for food spoils and families must seek alternative shelter.  Yet as we looked into the matter, we saw that there was smart grid technology available for deployment that could sharply reduce truck rolls necessary to restore power after storms have hit.  This could reduce both the number of outages and their average duration.  The Berkeley Lab published an exhaustive grid reliability study in August 2015, which we thought would shed light on the subject, but the report failed to ever mention this possible solution.  In quarterly earnings reviews, Generac management and institutional analysts covering this stock seemed to neither volunteer any information about the smart grid nor would they ask about it.  Is grid technology an existential threat to Generac’s business?  In this last segment of our discussion of Generac, we try to piece together this puzzling avoidance of what one would think is a crucial consideration for Generac shareholders.

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Stocks-in-Depth thoroughly examines the fundamentals of reasonably valued high-quality small and mid-cap growth companies. It is produced by GARP Research, a provider of equity research to institutions including many of the most well-known fund managers for over 20 years. GARP is known for its granular modelling of business lines and in-depth assessment of competition and served markets. Stocks-in-Depth searches for value and growth by researching stocks that may be out of favor, or where a major catalyst to earnings growth is hidden. Our financial models attempt to shed light on trends underneath opaque segment reporting. Stocks in Depth emphasizes balance sheet accounts and profitability margins to determine underlying return on capital, and maintains healthy skepticism regarding pro forma adjustments and undue reliance upon unconventional measures such as EBITDA. We emphasize field visits with managements, industry conferences, non-public competitors and ancillary fields to detect industry dynamics. In our search for the best companies and investment opportunities, we often challenge the consensus view. StocksinDepth forecasts over the long-term, typically over about a three year horizon, and review track records going back for years.