3 Reasons to Avoid GNRC and 1 Stock to Buy Instead

What a time it’s been for Generac. In the past six months alone, the company’s stock price has increased by a massive 49.2%, reaching $171.06 per share. This was partly due to its solid quarterly results, and the performance may have investors wondering how to approach the situation.

Is now the time to buy Generac, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free for active Edge members.

Why Is Generac Not Exciting?

We’re happy investors have made money, but we're sitting this one out for now. Here are three reasons there are better opportunities than GNRC and a stock we'd rather own.

1. Lackluster Revenue Growth

Long-term growth is the most important, but within industrials, a stretched historical view may miss new industry trends or demand cycles. Generac’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 4.7% over the last two years was well below its five-year trend. We also note many other Renewable Energy businesses have faced declining sales because of cyclical headwinds. While Generac grew slower than we’d like, it did do better than its peers.

2. Free Cash Flow Margin Dropping

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

As you can see below, Generac’s margin dropped by 6 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 11.6%.

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 isn’t a terrible business, but it doesn’t pass our bar. After the recent surge, the stock trades at 20.8× forward P/E (or $171.06 per share). While this valuation is reasonable, we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. Let us point you toward the most dominant software business in the world.

Stocks We Would Buy Instead of Generac

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