Analyst Sean Milligan’s fair value estimate for stock implies near-70% upside
Shares of Generac Holdings Inc. surged Wednesday, after Janney analyst Sean Milligan said the sharp selloff this year has provided investors an opportunity to buy into an established brand with a dominant share of the home generator maker at a deep discount.
The stock GNRC, +5.58% ran up 4.9% in afternoon trading, enough to pace all of the S&P 500 index’s SPX, -1.20% gainers.
The rally comes four days after the stock closed ($89.79) at the lowest price since April 2020. The stock remains the S&P 500’s worst performer in 2022, as it has plunged 72.8% year to date, highlighted by the record one-day selloff of 25.3% on Oct. 19, 2022 after the company issued an earnings warning and cut its growth outlook.
Janney’s Milligan said that while there is potential for continued headwinds in the core home standby (HSB) generator market, he believes the selloff over the past year has already priced those headwinds into the stock, and is assuming the company’s clean energy business is worthless.
He started coverage of Generac (GNRC) with a buy rating and stock fair value estimate of $160, which implies 67% upside from current levels.
“At current levels, we think the market is assigning zero value to GNRC’s clean energy business; put another way, we see a ‘free option’ on clean energy growth in GNRC shares,” Milligan wrote in a note to clients.
In early November, the company had revised its 2022 clean energy revenue guidance down to $300 million to $330 million from approximately $500 million, according to a FactSet transcript of third-quarter results.
Despite the guidance cut, which followed a bankruptcy filing by a large clean-energy-product customer, Milligan said he sees a “multi-year runway for GNRC’s clean energy business,” as the company rolls out a microinverter product in 2023 that competes with products from rivals Enphase Energy Inc. ENPH, -2.61% and SolarEdge Technologies Inc. SEDG, -5.87%
He acknowledged that his recommendation to buy Generac stock may be early, as the bottom of the HSB cycle isn’t expected to be hit until mid-2023, and ahead of the microinverter product launch, but he feels the stock is trading at too-big a discount to its industrial peers, and at an even bigger discount to its clean energy peers.
The stock has tumbled 49.0% over the past three months, while Enphase shares have lost 8.8% and SolarEdge’s stock has gained 8.1%. The S&P 500 has tacked on 2.4% the past three months.