My Disclaimer
I am a value investor. I am not a licensed or registered investment professional. I currently have NO investment position in the company mentioned in this report. Financial statement data was obtained from the company’s most recent SEC 10-K filing.

Risk
Past and future gains contained herein are based on actual and anticipated earnings, actual and anticipated dividends, and actual and anticipated price appreciation. Valuations, while given as a specific amount, are always within a valuation range. Investors should be aware that any investment has the potential for loss, and past performance is no guarantee of future results.

Intent
The intent of this report is to provide the reader with a brief overview of my various company valuations so they can independently determine their current level of investment interest.

What They Do
Generac Holdings is a designer and manufacturer of power generation equipment and other engine powered products for the residential, light commercial and industrial markets. Products include standby generators, portable and mobile generators, light towers which provide temporary lighting, and mobile heaters and pumps used in the oil and gas, and construction markets. Industry peers include Briggs and Stratton Power Products Group, LLC (NYSE: BGG) and Cummins Power Generation, Inc. (NYSE: CMI).

Recent Business Acquisitions
In April 2019, the company acquired Pika Energy, Inc., a manufacturer of innovative battery storage technologies, for a purchase price, of $49.1million, net of cash acquired. In March 2019, the company acquired Neurio Technology, Inc., an energy data company focused on metering technology and sophisticated analytics to optimize energy, for a purchase price of $59.1million, net of cash acquired.

Recent Business Divestitures
The company listed no new business divestitures in its most recent SEC 10-K filing.

Subsequent Events
There were no subsequent events identified between the company’s fiscal year end and the filing of its most recent 10-K.

Short-Term Target
My current short-term target for the stock is $112.29 with an initial trailing stop set at $115.98. Based on a recent price of $117.75, upward price movement will find resistance at $122.95. Downward price movement will find support at $111.96 and again at $107.7, with final support found at $104.13.

Volatility Adjustment
There are different metrics available to help investors determine the volatility of a particular stock as compared to the volatility of the market as a whole. To me, the beta ratio is the metric that is the most representative of a stock’s volatility. A beta ratio of less than 1 means that the security’s price will be less volatile than the market, while a beta ratio greater than 1 indicates that the security’s price will be more volatile than the market. Basis my current beta ratio for this stock of 0.94, my volatility adjustment to recent pricing is $8 per share, making my current volatility adjusted price $125.

Quality of Earnings
A company’s earnings can be impacted by sources unrelated to the company’s day to day operations. These unrelated sources may distort a company’s operating income and consequently its fair value. Investors should always explore the sources of a company’s operating income to better understand potential valuation impacts.

Of the company’s $5.11 per share in pre-tax earnings, $0.00 per share came from sources unrelated to day to day operations, and of the company’s $4.71 per share in net income, $0.00 came from income taxes and/or minority interests.

Key Performance Indicator Rating
I use key performance indicators (KPIs) as a barometer to measure the effectiveness of management. Several of the metrics that I use are the tangible asset ratio, return on invested capital, free cash flow growth, earnings growth, debt growth, the dividend payout ratio, and the cash conversion cycle. Admittedly, my use of these and other metrics as a way to determine the effectiveness of management is subjective. Be that as it may, for me, they work. Based on a 0-105 scale, my KPI for this company is 50.

Five Year Growth of $10K
Had you invested $10K in this company five years ago (12/31/14), you would have received 214 shares of stock with a cost basis of $46.76 per share. Had you held the stock for five years and then closed your position (12/31/2019), you would have closed at $101.12 per share. During that holding period you would have collected $1.00 in regular and special dividends, and your initial $10K investment would have returned to you $21,625 a gain of 116% excluding regular and special dividends.

Annual Shareholder Return
I calculate annual shareholder return by subtracting the stock price at the close of business on the last day of a company’s fiscal year, from the stock price at the start of business on the first day of the company’s fiscal year, plus any dividends paid during that period, and then dividing the result by the opening stock price on the first day of a company’s fiscal year. For fiscal 2019, the annual shareholder return was 103%. The average annual shareholder return over the prior five year period was 1%.

Cost of Common Equity
The cost of common equity is the minimum annual rate of return an investor should expect to earn when investing in shares of a particular company. I calculate this by adding the thirty-year treasury yield to the beta ratio for the stock multiplied by my default equity risk premium. My cost of common equity for this stock is 4.18%.

Insider Transactions
The SEC classifies insiders as “management, officers or any beneficial owners with more than 10% class of a company’s security.” Insiders are required to abide by certain rules and fill out SEC forms every time they buy or sell company shares. In addition, to prevent insider trading, or benefiting illegally from material non-public information that their positions give them access to, the law prevents insiders from deposing of shares within six months of their purchase. This effectively bars insiders from profiting from quick trades based on their “insider” knowledge.

Over the past 12 months, the company has recorded 111 insider trades involving 343,501 shares of stock. Of the total insider trades, 57 were Buys involving 175,630 shares of stock, and 54 were Sells involving 167,871 shares of stock, creating an insider buy to sell ratio of 1 to 1..

Enterprise and Equity Values
As a fair value investor, I am looking for companies that have low debt and generate lots of cash. To me, the easiest way to highlight a company’s ability to generate cash is to compare the Enterprise Value to the Equity Value, what I call my E2E Ratio. What I am looking for with this ratio is something close to or above 1, meaning the company generates cash at a rate equal to or faster than it generates debt. For this company my enterprise value (market cap plus debt less cash) is $129 and my equity value (market cap plus cash less debt) is $106, making my E2E Ratio, 0.82.

Risk/Reward Ratio
I determine my risk reward ratio by subtracting the current price from my terminate target and then dividing that result by my initiate target less a price fluctuation variable of 20%. What I am looking for with this ratio is a value of 5 or greater. My risk/reward ratio for this stock is (5).

Prior Average Valuations
My average valuation for the prior five year fiscal period was $36. The stock price during that time period averaged $43, earnings averaged $2.90 per share, and the average PE Ratio was 15. The current PE Ratio is 25.

Fair Value Investing
It is important to remember that the current fair market value of an equity is the price negotiated between a willing buyer and a willing seller. This fair market value is not the fair value of the associated company, but the negotiated value of a single equity trade.

To a fair value investor, consideration is given to a company’s overall financial condition including past and future earnings growth, free cash flow, both book and tangible book values, net current asset value, and many other valuation metrics in order to determine a fair value for the company as an on-going concern.

Accordingly, my most recent fair value estimate for this stock is $55. My worksheet target prices reflect this fair value estimate.

Generac Holdings, Inc. (NYSE: GNRC) – FYE 12/2019 – OVER VALUED – The stock is currently trading at levels above my most recent $88 terminate target. Please See Linked PDF Worksheet.

There you are, short and, hopefully, to the point.