Generator manufacturer Generac (GNRC) could stand to benefit from a hurricane season experts expect to be incredibly volatile compared to a 30-year average. Generac stock is up nearly 33% over the past 12 months and is currently outpacing the S&P 500 (^GSPC) year-over-year.
Generac CEO Aaron Jagdfeld sits down with Yahoo Finance in-studio to discuss how the company is adapting to rising energy demands from the US power grid, especially as AI adoption and EV charging are predicted to place exponential strains on the grid.
"Grid operators really have a significant challenge ahead of them in terms of balancing supply and demand. What we know in our business and watching this kind of play out over the last several decades is that reliability is on a downward trend," Jagdfeld says. "People are experiencing more outages, and so our core business of providing backup power with generators or batteries has really been on a tear."
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MADISON MILLS: Taking a look now at backup power manufacturer Generac. The shares are down this morning a little under 2%, but the stock has been on a tear up over 30% in the past year. And those gains are outpacing the S&P. This upside does come after experts have predicted a very active hurricane season to come here with potential for five major hurricanes coming up in the summer. And joining us now to discuss we have Generac CEO Aaron Jagdfeld. Aaron, thank you so much for being here with us this morning. So we were talking a little bit in the break about the read through of the macro inflation picture to your stock price and to the company of course. I'm just curious, How much of a macro impact is there?
AARON JAGDFELD: Yeah. I think, you know, higher interest rates obviously add cost to the kinds of products that we sell. So whether you're talking about solar plus storage or you're talking about generators, these are home improvement projects and higher interest rates generally, you know, make that a more expensive purchase.
SEANA SMITH: And what are you seeing from consumers just in terms of spending trends, whether or not they actually are holding back on some of these larger ticket purchases?
AARON JAGDFELD: Yeah. I think when it comes to a discretionary purchase, I think then, you know, you will see some pullback there just naturally. I think the interesting thing about our products is when there is an outage, though, right? If you get a hurricane or if you get a large storm, suddenly, those purchases that I think people think of as discretionary become, you know, absolute necessities. So that changes. Typically, the interest rates don't hurt us that much when we see outage activity. The outage activity was a little bit hot to start the year and cooled off the last couple of months. But we're just now getting into the season, so we'll see how it turns out.
MADISON MILLS: How do you prepare for that from a supply chain perspective?
AARON JAGDFELD: We've been doing this for a long time. So, you know, we have to basically, you know, we have to plan as if there's going to be a season, and there generally is. So we make our plans, we produce our products, we carry a lot of inventory as a result. So if you look at our balance sheet, you'd see that. But that's part of what we do as a company. We're ready for the events when they happen. You just don't always know when or where they're going to happen, but we have to be ready to react.
SEANA SMITH: You certainly have made some strategic moves with the company over the last couple of years. Recently adding a few more acquisitions here to your business, to the portfolio. Why does that make sense? And do you do you expect that trend to continue just in terms of more acquisitions in the pipeline?
AARON JAGDFELD: Yeah. For us, I mean, historically, we've been a backup generator company, right? So when the power goes out, our products go into the market and hopefully they-- you know, people are happy about that. We really have thought about things on a macro basis over the last five to six years. We look at the transition that's taking place in energy, the transition in the grid, right? From the old grid to the new grid, 1.0 to 2.0 or 3.0. I don't know which version of it we're on right now. But really moving into more of an energy technology space. So broadening out, not just about resiliency, but also about the cost of energy and conservation being an important element of that.
SEANA SMITH: So what changes have you made to your business as a result of that?
AARON JAGDFELD: So we've been broadening into areas like smart thermostats as an example, right? So it's not just about backup power, it's about all the energy in your home. EV charging, that's another really important space that, you know, as we pick up adoption for EVs, that is going to put an enormous amount of power needs on the grid. And so being able to control that and being able to manage that is going to be super critical for not only homeowners, but grid operators as well.
MADISON MILLS: You also have AI putting pressure on the grid.
AARON JAGDFELD: AI is a whole new story, right? It's a whole new part of the story. And that's the-- needs of energy are projected to triple in AI just in the next five years. And that's-- it's basically the equivalent of adding like 40 million new households to the grid. So, I mean, it's a tremendous amount of power. And I don't think-- it's one of those areas that it's come on so quickly that I think grid-- you know, grid operators and utilities are really struggling to figure out how to satisfy that demand.
SEANA SMITH: What does it mean more specifically for your business?
AARON JAGDFELD: Well, for us, obviously, you know, when you see increases in demand like that and you also have situations on the supply side, as we work to decarbonize supply side, we're retiring coal plants in favor of, you know, wind and solar, which is great, but those are intermittent sources instead of sources that can run 24/7. So grid operators really have a significant challenge ahead of them in terms of balancing supply and demand. What we know in our business and watching this kind of play out over the last several decades is that reliability is on a downward trend. So, you know, people are experiencing more outages. And so our core business of providing backup power with generators or batteries has really been on a tear.
This new element of energy cost-- I think this is the thing that's coming in the future. As you try to take care of all of this added, you know, demand from AI, from EVs, all the things that are going-- heat pumps, right? I mean, we're converting everything in our homes to electrical appliances. This is going to drive reliability probably-- unfortunately, for most people are going to experience more outages. And that's only going to be good for our business.
MADISON MILLS: What do you anticipate if you were kind of looking at this from a policy perspective? What would be a helpful solution to that challenge?
AARON JAGDFELD: I do think some of the policy things that have come into play here in the last year with the IRA, those have been helpful. I do think that it's really important that we get focused on, you know, trying to build up the supply chains that we need, whether it be around battery supply chains or, you know, chip supply chains. These important technology supply chains are a critical element of this, but we need to do more. We need to have, you know, from solar production, right? We need to have more incentives around solar and more incentives around battery. I do think that, you know, it's a very complex problem.
The grid is a-- 3,200 independent utility companies across the US. 3,200 oversight bodies, so it's almost a one to one relationship. And it just creates a situation where it's very difficult to make change quickly. But unfortunately, things like AI aren't going to wait for the natural state of affairs to play out in their normal course. So I do think that some policy-related things could be very helpful to help accelerate some of these things that need to get done.
SEANA SMITH: Aaron Jagdfeld, we really appreciate you taking the time, especially joining us here in studio. CEO of Generac. Thanks so much, Aaron.