Generac (GNRC)

Power generation products company Generac (NYSE:GNRC) fell short of the markets revenue expectations in Q3 CY2025, with sales falling 5% year on year to $1.11 billion. Its non-GAAP profit of $1.83 per share was 16.7% below analysts’ consensus estimates.

Company Overview

With its name deriving from a combination of “generating” and “AC”, Generac (NYSE:GNRC) offers generators and other power products for residential, industrial, and commercial use.

Renewable energy companies are buoyed by the secular trend of green energy that is upending traditional power generation. Those who innovate and evolve with this dynamic market can win share while those who continue to rely on legacy technologies can see diminishing demand, which includes headwinds from increasing regulation against “dirty” energy. Additionally, these companies are at the whim of economic cycles, as interest rates can impact the willingness to invest in renewable energy projects.

Competitors of Generac include Cummins (NYSE:CMI), Eaton (NYSE:ETN), and private company Kohler.

Examining a company’s long-term performance can provide clues about its quality. Any business can put up a good quarter or two, but many enduring ones grow for years. Over the last five years, Generac grew its sales at an excellent 13.5% compounded annual growth rate. Its growth beat the average industrials company and shows its offerings resonate with customers.

We at StockStory place the most emphasis on long-term growth, but within industrials, a half-decade historical view may miss cycles, industry trends, or a company capitalizing on catalysts such as a new contract win or a successful product line. Generac’s recent performance shows its demand has slowed significantly as its annualized revenue growth of 4.2% 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.

We can better understand the company’s revenue dynamics by analyzing its most important segments, Residential and Commercial and Industrial, which are 56.3% and 32.1% of revenue. Over the last two years, Generac’s Residential revenue (sales to consumers) averaged 9.5% year-on-year growth. On the other hand, its Commercial and Industrial revenue (sales to contractors and pros) averaged 2.2% declines.

This quarter, Generac missed Wall Street’s estimates and reported a rather uninspiring 5% year-on-year revenue decline, generating $1.11 billion of revenue.

Looking ahead, sell-side analysts expect revenue to grow 7.7% over the next 12 months, an improvement versus the last two years. This projection is above the sector average and indicates its newer products and services will catalyze better top-line performance.

Generac’s unit economics are great compared to the broader industrials sector and signal that it enjoys product differentiation through quality or brand. As you can see below, it averaged an excellent 36.2% gross margin over the last five years. Said differently, roughly $36.24 was left to spend on selling, marketing, R&D, and general administrative overhead for every $100 in revenue.

Generac produced a 38.3% gross profit margin in Q3, down 1.9 percentage points year on year. Zooming out, however, Generac’s full-year margin has been trending up over the past 12 months, increasing by 1.8 percentage points. If this move continues, it could suggest better unit economics due to some combination of stable to improving pricing power and input costs (such as raw materials).

Operating margin is one of the best measures of profitability because it tells us how much money a company takes home after procuring and manufacturing its products, marketing and selling those products, and most importantly, keeping them relevant through research and development.

Generac has been an efficient company over the last five years. It was one of the more profitable businesses in the industrials sector, boasting an average operating margin of 13.1%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, Generac’s operating margin decreased by 9.5 percentage points over the last five years. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

In Q3, Generac generated an operating margin profit margin of 9.3%, down 5.1 percentage points year on year. Since Generac’s operating margin decreased more than its gross margin, we can assume it was less efficient because expenses such as marketing, R&D, and administrative overhead increased.

Revenue trends explain a company’s historical growth, but the long-term change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

Generac’s EPS grew at an unimpressive 5.1% compounded annual growth rate over the last five years, lower than its 13.5% annualized revenue growth. This tells us the company became less profitable on a per-share basis as it expanded due to non-fundamental factors such as interest expenses and taxes.

Diving into the nuances of Generac’s earnings can give us a better understanding of its performance. As we mentioned earlier, Generac’s operating margin declined by 9.5 percentage points over the last five years. This was the most relevant factor (aside from the revenue impact) behind its lower earnings; interest expenses and taxes can also affect EPS but don’t tell us as much about a company’s fundamentals.

Like with revenue, we analyze EPS over a shorter period to see if we are missing a change in the business.

For Generac, its two-year annual EPS growth of 21.2% was higher than its five-year trend. This acceleration made it one of the faster-growing industrials companies in recent history.

In Q3, Generac reported adjusted EPS of $1.83, down from $2.25 in the same quarter last year. This print missed analysts’ estimates. Over the next 12 months, Wall Street expects Generac’s full-year EPS of $7.54 to grow 15.8%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because you can’t use accounting profits to pay the bills.

Generac has shown impressive cash profitability, enabling it to ride out cyclical downturns more easily while maintaining its investments in new and existing offerings. The company’s free cash flow margin averaged 7.9% over the last five years, better than the broader industrials sector.

Taking a step back, we can see that Generac’s margin dropped by 3.5 percentage points during that time. Continued declines could signal it is in the middle of an investment cycle.

Generac’s free cash flow clocked in at $96.5 million in Q3, equivalent to a 8.7% margin. The company’s cash profitability regressed as it was 7 percentage points lower than in the same quarter last year, suggesting its historical struggles have dragged on.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although Generac hasn’t been the highest-quality company lately, it historically found a few growth initiatives that worked out well. Its five-year average ROIC was 14.8%, impressive for an industrials business.

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. Over the last few years, Generac’s ROIC has unfortunately decreased significantly. We like what management has done in the past, but its declining returns are perhaps a symptom of fewer profitable growth opportunities.

Generac reported $300 million of cash and $1.59 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $795 million of EBITDA over the last 12 months, we view Generac’s 1.6× net-debt-to-EBITDA ratio as safe. We also see its $32.13 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

Generac missed across the board, with revenue, EBITDA, and EPS all missing. Overall, this was a bad quarter. The stock traded down 15.3% to $161 immediately following the results.

Updated: December 3, 2025 at 10:30 PM EST

Before investing in or passing on Generac, we urge you to understand the company’s business quality (or lack thereof), valuation, and the latest quarterly results - in that order.

Generac’s business quality ultimately falls short of our standards. Although its revenue growth was impressive over the last five years, it’s expected to deteriorate over the next 12 months and its diminishing returns show management's prior bets haven't worked out. And while the company’s strong operating margins show it’s a well-run business, the downside is its projected EPS for the next year is lacking.

Generac’s P/E ratio based on the next 12 months is 20.7x. While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better investments elsewhere.

Wall Street analysts have a consensus one-year price target of $206 on the company (compared to the current share price of $159.17).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.