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Hot IPO Stock Trading at 8 Times Earnings?

If there can be said to be a stock market “winner” in the aftermath of Super Storm Sandy, that winner would have to be Generac Holdings (GNRC).

Who? Well, whenever you hear New Jersey and New York residents fretting about trying to find gasoline to fuel their generators, odds are that those generators, whirring away noisily in the television coverage of this and other hurricanes, were made by Generac.

Millions of customers in the area were left without power in the wake of Sandy, and while not all of them owned Generac generators, a significant number did, or rushed out to buy them, remembering all too well the events of last year, when August’s Hurricane Irene was followed by a freak Halloween snowstorm. Enough, they decided. That’s going to be great news for Generac’s sales in the fourth quarter.

GNRC Revenue Quarterly Chart

GNRC Revenue Quarterly data by YCharts

The publicity alone was enough to drive Generac’s share price sharply higher – yesterday alone, it soared 12.4%. Added to that is the fact that the company reported better-than-expected earnings of 37 cents a share, and revenues at the high end of its guidance, just as the cleanup effort on the East Coast began last week. The company boosted its outlook for sales growth for 2012 from 30% to 40% in the wake of Sandy. Nice hockey stick at the end of this stock chart.

GNRC Chart

GNRC data by YCharts

The question facing investors now will be whether the stock’s share price – which has now nearly trebled since its IPO in early 2010 – has risen too far, too fast.

As the charts below show, Generac’s PE ratio relative to its growth is rising, meaning that investors are paying more for each bit of growth, and the rate at which its PE ratio has grown over the last 12 months is far greater than the growth in the PE ratio of the S&P 500 index or the price gains in that bellwether index over the same period.

And yet, even after their recent dramatic gains, Generac’s shares trade at only about 8 times trailing 12-month earnings, only slightly half of the level the S&P 500 index commands. So what if you’re paying more per unit of growth when that growth in revenue is likely to be significantly higher, and the stock still trades at a discount?

GNRC PEG Ratio Chart

GNRC PEG Ratio data by YCharts

GNRC PE Ratio TTM Chart

GNRC PE Ratio TTM data by YCharts

Nonetheless, there’s no guarantee that consumers will be as willing to pay $1,000 or so for a backup generator if this winter turns out to be relatively balmy and without the kind of storms that generate big headlines and dramatic photos about widespread power outages.

Suzanne McGee is a contributing editor at YCharts, which includes the just-released YCharts Pro Platinum for professional investors.

Read more articles about: Company Analysis  

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