I recently wrote an article titled "Sandy's Silver Lining; Generac" that described how Hurricane Sandy was driving sales for Generac (GNRC) generators. However, I noted that I wouldn't invest for the long term based on one single hurricane.
GNRC represents a classic change investment that is understandable and ironically emerged from the destructive gales of Hurricane Sandy. If there are any silver linings to the clouds of Sandy, GNRC may be one of them, but investors should use caution entering the pool because hurricanes don't happen that often, and the one year forecast is for stormy weather as June comparable earnings loom overhead.
Well, sure enough, GNRC reported earnings that beat analysts estimates:
Generac Holdings, Inc. reported second-quarter adjusted EPS of $0.95 after the close Monday, which topped the consensus estimate of $0.76.
And drove the stock "sharply" higher:
Generac Holdings gapped open sharply higher Tuesday and is now up 3.04 at $44.07. The stock has broken out past resistance and has set a new high for the year.
The strong earnings should have been no surprise, and I must admit I would have expected Wall Street to have done a better job with its estimates. But the key point is that those earnings are generated off of a hopefully one-time event: Hurricane Sandy. Unless there is another natural disaster, investors shouldn't expect the earnings momentum to continue. That is exactly the message management is currently communicating and that I wrote about in my previous article.
The generator maker earned 95 cents per share for the second quarter, excluding certain items, well above estimates of 76 cents. Revenue was also well above estimates, although the company warned that it would start to run into tough comparisons to the year-earlier period. Sales soared during Hurricane Sandy and other weather disruptions last year.
GNRC reported strong earnings, but the company should have been discounted in the stock price. The stock price responded nicely today, but I would not expect those gains to hold. In my opinion, the strong earnings were too predictable. As management is saying today, going forward things are going to get a lot more difficult. Unless there is a catalyst to keep the earnings momentum going, GNRC may see the energy run out of its stock price.
Disclaimer: This article is not an investment recommendation. Any analysis presented in this article is illustrative in nature, is based on an incomplete set of information and has limitations to its accuracy, and is not meant to be relied upon for investment decisions. Please consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication, and are subject to change without notice.