Barron's Streetwise - CEO Chat: Generac

Episode Date: July 13, 2021

Over the past 12 months, shares of the home generator company have shot up twice as fast as Tesla's. Learn more about your ad choices. Visit megaphone.fm/adchoices

Calling all sellers, Salesforce is hiring account executives to join us on the cutting edge of technology. Here, innovation isn't a buzzword. It's a way of life. You'll be solving customer challenges faster with agents, winning with purpose, and showing the world what AI was meant to be. Let's create the agent-first future together. Head to salesforce.com slash careers to learn more. So our mission for the last 30 years has really been about education. There is a more elegant solution to a power outage and something that can help you help solve those power needs

in a higher functioning way than the traditional methods. Hello and welcome to the Barron Streetwise podcast. I'm Jack Howe, and the voice you just heard, that's Aaron Jogfeld. He's the CEO of Generac, which is a company best known for its residential standby generators, the kind that can kick on automatically in a power outage and run an entire home for days or even weeks. But who wants to talk about generators when they could be talking about something exciting like electric cars and the shocking rise in Tesla's stock price? The answer is anyone who's been paying attention to Generac stock. Because over the past year, it's up 247%.

That's double Tesla's gain. And over the past decade, Generac stock has returned nearly 3,200%, which means it's done about twice as well as Apple and Amazon. In a moment, we'll learn why, and Tesla has something to do with it. This is the final episode in a series of top CEO chats. Like the others, it'll be a short episode with limited narration. We'll be back with regular episodes this coming Friday. On to Generac. Many people use the words engine and motor interchangeably, but those words can also refer to totally different things.

A traditional car uses a combustion engine. It ignites fuel to create motion, and then it transmits that motion to the wheels using a mechanical system called a transmission. A Tesla, on the other hand, doesn't have an engine, but it does have electric motors. Those can turn battery power into motion. Don't ask me why traditional motorcycles aren't called engine cycles since they're powered by engines, and why electric motorcycles aren't just called motorcycles since they use electric motors. motorcycles, since they use electric motors. Anyhow, a typical home generator resembles the combustion engine in a car, except instead of transmitting motion to wheels, it converts the motion to electricity. There are portable home generators that burn gasoline or diesel fuel and

can power a handful of essential appliances like the refrigerator. There are also standby generators that can power entire homes. Many of those run on propane or natural gas. Generac created the market for home standby generators decades ago, and today it controls an estimated three-quarters of the market. So if Tesla is in the business of eliminating combustion engines and Generac uses combustion engines, why would the rise of one be contributing to the success of the other? It's because of the growing electrification of homes. Electric car owners, after all, charge their cars at home, which raises their electricity usage. The same is true of those who replace, let's say, gas-burning lawnmowers with battery-powered ones. And homeowners who replace oil or gas heat with electric heat pumps.

All of these people are burning less fuel but drawing more electricity. fuel but drawing more electricity. And that, combined with more people working from home during the pandemic and more extreme weather events, has strained some electric utilities. Last year, U.S. power outages jumped 73 percent. And that means that at just the moment when homeowners are increasing their reliance on electricity, their electricity supply has been growing less reliable. I know what you're thinking. You don't need a combustion engine to provide backup power for homes. You can use batteries, like the Tesla Powerwall. And you're right. Generac even sells its own batteries for backup power. But for the moment, for backup power that can last days or weeks rather than hours, or that can power big homes, or that can run power-intensive applications

like geothermal heating, nothing beats having a little combustion on standby. I know environmentalists don't love the sound of that, but this is combustion that you use in a pinch, not all the time. And the easiest way I can explain where things stand today is that it takes me less than five minutes to fill a car with enough gasoline to travel 280 miles, but at least a half hour to give an electric vehicle that much charge. For day-to-day driving, that's fine. Electric cars are good enough today and are rapidly improving. But for homeowners who are going green, standby generators can still make a lot of sense. And that helps explain why generator sales are soaring. Generac's backlog is estimated at eight times what it was in 2013, the year after Hurricane Sandy. And that's enough of my motor mouth. I asked Generac CEO

Aaron Yagfeld to explain in his own words what's behind the company's success. Our business is underpinned by power outages and concerns about power security. And those concerns have only been exacerbated here with the pandemic as more people have been working from home and your kids are learning from home, virtual classrooms. And what that's done is it's created a situation where I think people are just a lot more in tune with the importance of a continuous source of power in their own homes and businesses. And so as they experience outages from, it could be weather events, grid failure, component failure, the grids aging and is underinvested in.

Things get really primitive very quickly when you don't have power, especially in today's world where we're basically trying to electrify everything in our lives, right? Tell me a little more about that electrification. Well, what's happening there? What's the effect on the grid and on your business? I mean, this is something that I think as a populace, we're working towards decarbonization of our energy use. And I think a big step in that direction is to convert from more carbon intense forms of energy, whether that be diesel fuel or gasoline

or coal fired energy plants, utility plants to greener sources, cleaner sources of power. And so that's happening on both sides of the grid, right? So think of the grid as a system, a system of production on one side and a system of consumption on the other side. On the production side, you have all of these large utility plants, like a traditional centralized coal-fired plant or a natural gas-fired plant or a nuclear plant producing power and then sending that power perhaps hundreds of miles across wires down to your home or business to a meter. On the demand side, the electrification of everything is driving a trend where our energy

needs and our energy uses are shifting and changing as, again, we try to decarbonize our own energy use either by being more efficient in how we consume power, you know, LED lights and things of that nature. But then we're also even electrifying things, you mentioned it before, transportation, you know, EVs, as we pick up the adoption rate for electric vehicle. Outdoor power equipment is a great example. Our lawn and garden equipment is starting to be electrified. We're using battery-powered mowers instead of gas-powered mowers. Those things all require juice from the home that they didn't before. And so you have all of these new things going on on the demand side. You have all of these changes happening on the supply side. And what you end up with is a lot more volatility in the grid. And that volatility oftentimes

manifests itself in power quality issues. I think of Generac as standby generators, highly regarded, powered by fossil fuels in many cases, but you're also talking about the trend toward electrification. So what's your message to investors who want to know about how green you are? Yeah, I think it's a two-part message. The first part of the message is that our main focus is on the consumption of natural gas in those generators, which for the most part is a much cleaner way to create energy. You know, if you have to create energy, it's one thing to store energy in a battery or to create energy from other higher carbon sources like diesel fuel. You know, if you're going to use a diesel generator as an example, which was, that's largely been the historical way to produce powers with a diesel generator. We've been very focused on natural gas for over 30 years.

We believe it's a cleaner fuel. We believe that actually it's a better way to produce power. You're connected to the pipeline. You don't have to refuel a generator set. We think it's a more reliable way to create backup power. But as we transition and as the world focuses on decarbonization, we do see an opportunity to participate there as well. So we've done a number of acquisitions over the last several years, acquired a company called PICA Technologies, which is involved in energy storage. So these are our battery systems that you would attach to a solar system in your home. And the cost continues to drop on that technology and the density of those batteries or the performance of those batteries continues to improve. But they are for limited duration outages. So you're really talking something that's going to be shorter, four hours to eight hours at a maximum. And as I said before, they

pair exceptionally well if you already have an existing solar system or if you're thinking about solar for your home. A storage device is exactly that. It's storing the power. It's not producing the power, whereas the generator is actually producing power and can be a replacement for utility. A battery system is really just used in conjunction with some other generating source that you have on your home, whether it be solar or wind or a geothermal loop or something like that. As technology continues to improve and the cost curve continues to come down, those two spheres could begin to

overlap more closely where in the future, perhaps as battery technology improves, maybe battery technology can get you to 24 hours or 48 hours of backup. And that will probably get people to move away from generators and move more to batteries over time. But today we really see them as different markets. You've got pretty dominant market share. The brand is almost like my grandmother, instead of saying tissue, she used to say Kleenex. It's almost one of those type brands. How do you defend your market share? How do you stay safe from competitors who might be looking to get into that or gain share in that business? Yeah, it's been a tremendous business. We invented the category almost 30 years ago.

We produced the first kind of residential, permanently installed generator set. Prior to that, you would solve that problem by buying a portable generator that uses gasoline and you'd have extension cords and they're kind of loud and they're not going to power everything in your home. It's really for a bunch of limited things. And obviously, you've got to be home to run that. So we developed the category because people were asking for a different solution, something that could work off the home's fuel system if you had natural gas or propane, something that was automatic, as I was saying before, and then clearly something that could power the entire home. So you didn't have to make any trade-offs about what gets backed up in the

home. Where we found ourselves here 30 years later is a really interesting place. As you said, we have a fantastic market share. But the way we think about the market is not about so much the share of the market. It's about creating new parts of the market. So today, only 5% of US households have a home standby generator. 95% don't. And a lot of that continues to be around people not really understanding that a product like this exists. So our mission for the last 30 years has really been about education. There is a more elegant solution to a power outage and something that can help you help solve those power needs in a higher functioning way than the traditional methods. I saw one of your signs, it just inside the door at a local

home improvement store. How else do you get in front of people who don't even really know what the product is? They don't know where to go to get it. How do you reach people like that? It really comes down to getting share of their eyeballs. How do you get in front of them? Whether it's that sign in the retail entryway, whether it's a digital ad, whether it's an infomercial. We have a number of infomercials that play throughout the day on many, many stations. And so when you explain what you do and you explain how the product works, it's amazing the kind of interest level you can create just from a simple conversation. So our world has been about how do we create that simple conversation

throughout the tremendous amount of different media that you can use to reach people? I think you may have already answered my last question for you, which is what are the growth opportunities you're most excited about from here? But if you're only in 5% of homes, you don't have to think too hard about the growth opportunities. Yeah, no, it's great, Jack. And I would say that, you know, aside from the home standby opportunity that we talked about with 5% and our battery opportunity as that technology continues to advance and as solar penetration continues to increase. We also have a commercial and industrial business that's growing very, very nicely. And one focal area there in particular is serving for backup power for the wireless operators, the wireless telecom carriers. We're the number one operator in that space as well. So when you see the cell phone towers along the highways, oftentimes you'll see a Generac generator

on those towers. And as the carriers shift to the next generation, the 5G technology, it's going to enable a whole host of high-functioning technologies, automated driving, drone delivery, robotic surgery. All of these really cool technologies are going to run on the backbone of the new 5G network that's being built out there by all the carriers. But the reliability of that network is going to take a completely different place going forward. In the past, it was aggravation to have a dropped call, right? I mean, you drive along the highway, and you might lose a call, or you might not be able to push through an email. In the future, if you're in your car, and your car is automatically driving down the highway at 70 miles an hour and the tower up ahead doesn't have power and there's

no signal, I mean, what happens? Does your car just kind of drift off to the safety lane and wait to reacquire signal? That's maybe a best case scenario, right? So as the leader in that industry, we see it's just a tremendous opportunity to help those wireless operators build out and harden those networks as they move to 5G. Thank you for listening. Jackson Cantrell is our producer. Subscribe to the podcast on Apple Podcasts, Spotify, or wherever you listen to podcasts. If you listen on Apple, write us a review. If you want to find out about new stories and new podcast episodes, you can follow me on Twitter. That's at Jack Howe, H-O-U-G-H. See you next week.