3 Reasons GNRC is Risky and 1 Stock to Buy Instead

Over the past six months, Generac’s shares (currently trading at $146.71) have posted a disappointing 8.5% loss, well below the S&P 500’s 5.2% gain. This might have investors contemplating their next move.

Is there a buying opportunity in Generac, or does it present a risk to your portfolio? Get the full stock story straight from our expert analysts, it’s free.

Why Do We Think Generac Will Underperform?

Despite the more favorable entry price, we're swiping left on Generac for now. Here are three reasons why you should be careful with GNRC and a stock we'd rather own.

1. Revenue Growth Flatlining

We at StockStory place the most emphasis on long-term growth, but within industrials, a stretched historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Generac’s recent performance shows its demand has slowed significantly as its revenue was flat over the last two years. We also note many other Renewable Energy businesses have faced declining sales because of cyclical headwinds. While Generac’s growth wasn’t the best, it did do better than its peers.

2. Free Cash Flow Margin Dropping

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

As you can see below, Generac’s margin dropped by 7.1 percentage points over the last five years. Continued declines could signal it is in the middle of an investment cycle. Generac’s free cash flow margin for the trailing 12 months was 12.6%.

3. New Investments Fail to Bear Fruit as ROIC Declines

A company’s ROIC, or return on invested capital, shows how much operating profit it makes compared to the money it has raised (debt and equity).

We like to invest in businesses with high returns, but the trend in a company’s ROIC is what often surprises the market and moves the stock price. Unfortunately, Generac’s ROIC has decreased significantly over the last few years. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Final Judgment

Generac falls short of our quality standards. After the recent drawdown, the stock trades at 18.1× forward P/E (or $146.71 per share). This valuation is reasonable, but the company’s shaky fundamentals present too much downside risk. There are superior stocks to buy right now. Let us point you toward an all-weather company that owns household favorite Taco Bell.

Stocks We Like More Than Generac

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