When we first examined the home standby generator market, we were struck by what seems to be a unanimity of opinion that tremendous secular growth would be driven by homeowners increasingly discovering the benefits of having an automated system to supply electric power in times of outages.  It’s argued that penetration is low, and that loss of power is not only inconvenient, but uneconomic, for food spoils and families must seek alternative shelter.  Yet as we looked into the matter, we saw that there was smart grid technology available for deployment that could sharply reduce truck rolls necessary to restore power after storms have hit.  This could reduce both the number of outages and their average duration.  The Berkeley Lab published an exhaustive grid reliability study in August 2015, which we thought would shed light on the subject, but the report failed to ever mention this possible solution.  In quarterly earnings reviews, Generac management and institutional analysts covering this stock seemed to neither volunteer any information about the smart grid nor would they ask about it.  Is grid technology an existential threat to Generac’s business?  In this last segment of our discussion of Generac, we try to piece together this puzzling avoidance of what one would think is a crucial consideration for Generac shareholders.

Generac astutely commandeered the clear leadership position in home standby generators during the late 1990s and after the start of the millennium.  In so doing, it developed an expertise in engines optimized for burning natural gas or propane, such as its 2-cylinder OVHI 1,000 cc displacement engine that can deliver 16 kW of standby power, as well as by making transfer switches and other related technologies.  Moreover, it has structured its supply chain to optimize a position as an “asset light” assembler that can nevertheless exert control over its intellectual property.  But home standby is a niche market, and management has not wanted its growth constrained.  It has used M&A to forge ahead into the commercial & industrial markets, historically the domain of entrenched leaders Cummins Onan and Caterpillar.  It has also become a leader in tower lighting, for which it does not even make engines.  It has also reentered the small-engine portable generator space, and developed a line of power washers.  In this segment, Stocks-in-Depth examines the competitive dynamics affecting Generac in its usual granular and entertaining style, providing cameos of several surprisingly profitable innovators against which Generac must wrestle away market share to succeed.