CAPScall of the Week: Generac Holdings

For years, satirical late-night-TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.

That's why this week and every week from here on out, I'll make it a tradition to examine one seldom-followed company within the Motley Fool CAPS database and make a CAPScall of outperform or underperform on that company.

For this week's round of what I like to call "Better Know a Stock," I'd like to take a closer look at Generac Holdings (NYS: GNRC) .

What Generac Holdings does
Generac Holdings is a manufacturer of standby generators for the residential, industrial, and commercial markets, and is also responsible for performing technical work on engines, alternators, and other related components. According to Generac's CEO, Aaron Jagdfeld, the company controls about 70% of the residential standby generator market.

In Generac's most recent quarter, the company announced a 48.2% increase in total sales and a 41.5% increase in adjusted EPS. Driving growth was a 33.8% jump in residential product sales and a 76.4% surge in commercial and industrial segment sales. The big jump in revenue from the commercial and industrial segment was due to its acquisition of Magnum Products, a manufacturer of light towers, in October for $80 million.

Whom it competes against
In spite of controlling a stranglehold on the standby generator market for homeowners, it faces stiff competition in the industrial and commercial sectors from companies with considerably deeper pockets and product offerings than Generac has.

Although commercial and industrial generators aren't the focus product for Caterpillar (NYS: CAT) and Cummins (NYS: CMI) -- who tend to focus on heavy-duty machinery and diesel engine production, respectively -- they nonetheless represent a challenge for Generac. Cat's offerings are particularly unique because they can be run off of oil, natural gas, or other alternative fuels, while Cummins' generator sales have benefited in recent weeks after multiple grid failures in India.

The competition doesn't end there, however. In addition to taking on these premier heavy-duty-manufacturing companies, Briggs & Stratton (NYS: BGG) and Babcock & Wilcox (NYS: BWC) are in the mix as well. Briggs & Stratton, Generac's closest residential competitor, saw total engine sales slump 6.4% in 2012, but noted increased generator sales as one of its very few highlights. Babcock & Wilcox deals primary with the U.S. government in developing steam generators, but it nonetheless represents another threat to Generac.

It's also worth noting that only Generac and Babcock & Wilcox fail to pay a regular dividend among this group.

The call
After reviewing the prospects for Generac Holdings, I've decided to make a CAPScall of outperform on the stock.

This isn't a cut-and-dried buy call as Generac will face stiff competition in its commercial and industrial segments. It made, what I feel, was a poor choice in distributing a special one-time dividend of $6 using both cash and debt, rather than instituting a regular cash dividend, which would have been the smarter move. In spite of these challenges, Generac's dominance in residential generators is unmatched. The company's line of products hits multiple price points and power generation possibilities, and it's a near-necessity product, as I've touched on before. Generac has made smart acquisitions which are immediately accretive to earnings and further enhance its product diversity. Now, if they'd only institute a regular cash dividend... hint, hint... anyone listening?

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Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.Motley Fool newsletter services have recommended buying shares of Cummins. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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