Generac Holdings (GNRC)

By both methods, the value today (DCF $172 · Multiples $204) is below the market price ($218).

Today — expensive, no margin of safety: at $218 trades ~7.1% above its value discounted to today (~$204); the expected return does not even reach the risk-free rate (4.5%).

At 5 years — Preserva valor: the target price ($254) plus dividends yield just enough to preserve nominal capital, below the required 4% floor.

The bridge: the return at 5 years falls below the risk-free rate (4.5%) — which is why there is not even a discount to today's value. To require a 15% annual return, it would need to be bought at ~$126.

Educational / informational. Does not constitute investment advice.

The inverse approach: instead of projecting growth to obtain the value, the market price ($218) is taken as given and it solves for what annual owner-earnings growth would need to hold for 5 years for the present value —at the method's rate (4.5%, no-growth terminal)— to equal that price. It is the disconfirmation test: the expectations the price already pays for, contrasted against the method's projection.

The price discounts growth (14.3%/year) above our base case (9.0%/year) → it is priced for a demanding scenario and leaves little cushion against a slowdown.

That growth implies ~$0.7 bn of owner earnings in year 5 (vs ~$0.5 bn of our base case). It recalculates if the DCF assumptions are edited.

Year-by-year projection of the selected scenario. From each year, two versions of the flow are derived: growth FCF (operating flow − total capex, the cash surplus) and maintenance FCF (the owner earnings: what the business yields if it only sustains its capacity). Cash accumulates the retained surplus —what is not returned as dividend or buyback—, so that EV falls and multiples compress going forward. The valuation is done on EV/EBIT. In edit mode, revenue, margins, capex, and exit multiples can be adjusted.

It is valued on EV/EBIT (industrial archetype, §4) and not on P/E: unlike Caterpillar (the structural twin), Generac has no captive finance arm, so the correct metric is the one in the standard table for capital-intensive manufacturing, not the CAT exception. Year 0 is the TTM ended 30-Jun-2026 (XBRL). The path starts from the guidance in the release of 29-Jul-2026 (8-K, Item 2.02): total sales guided in the mid-to-high teens for fiscal 2026 versus 2025, with C&I guided in the low thirty per cent range (driven by the data-center backlog, ~US$1,600M) and Residential in the high single digits. The segment check (FY2025 weights: Residential ~54% at ~7.5%, C&I ~35% at ~30%, Other ~11.5% at ~5%) gives a blend of ~15%, within the guided range — 15% is used as the year-1 anchor, decaying geometrically to ~7% by year 5 (the high ceiling of the mid-cycle industrial band 4-8%, justified by the barely penetrated residential TAM, ~6.75%, and backlog visibility into 2027). The TTM EBIT margin (9.5%) is distorted in both directions: the 2025 result carried US$158M of legal and regulatory provisions (a US$104.5M product liability settlement on portable generators) that depressed the operating margin to 6.9% that year, while the second quarter of 2026 included a one-off tariff refund of ~US$71M (~1.5 points of margin for the full year, per the company's own guidance). The margin path rises toward ~13.5% by year 5, reflecting the mix shift toward C&I/data centers and the normalization of non-recurring items, without extrapolating the tariff refund. The tax rate (18.9%) is the effective rate reported in XBRL. TTM capex (US$169M) is below TTM D&A (US$205M): with this pattern, practically all reported capex is maintenance (Greenwald, §3); maintPct=0.85 is used, leaving a small allowance of growth capex for the data-center capacity expansion (the Belvidere, Illinois plant). cajaStart and deuda are the real balance sheet levels (cash US$265M, total debt US$1,213M) because the flow is pre-interest (EV-level, §6): it cannot be modeled with a cash/debt bridge at zero. Share repurchases were paused over the last twelve months (TTM buyback = US$0, after US$147.9M in the first half of 2025) because of the Enercon acquisition (~US$212M) and the 2025 legal settlement; accumulateCash=true is used instead of a share path, with real fcfLtm and buybackLtm so that retention is calculated on actual flow. ΔNWC was approximated from the 10-Q cash flow reconciliation (the net change in operating assets and liabilities); no exact TTM series is available with the data provided — it is declared as an approximation.

Today's elevated multiple is the price of growth: if the business grows, the entry point cheapens on its own going forward (EV falls as cash increases). The exit multiple at 3 years is higher than the terminal at 5 years —at 3 years there is more growth still ahead—, so the value curve shows whether value creation is concentrated in the early or the later years. The required return is applied to the base scenario.

They are valued separately, with their own rationale, and are not incorporated into the base or the verdict (they are excess return). When assigning them value — in Editmode —, the total with optionalities updates live, without moving the base.

The verdict, the base CAGR, and the margin of safety are always calculated on the base; optionalities do not alter them (with optionalities at $0 they do not move).

Each card fixes a required annual return and answers: if the business is worth $254 in 5 years, what is the maximum that can be paid today to obtain that return? Since it now trades at $218, the margin of safety is how much cheaper the market is than that maximum. The three thresholds: 4% covers inflation (the floor), 10% is the long-term average return, and 15% is the level of a great investment.

With a target price of $254 in 5 years and a required return of 4.5% annually, the maximum to pay today is $204. Against the current market price ($218), the margin of safety is -7.1% (trades above the maximum → a premium is paid) and the total return at that price would be 3.1% annually.

• Entry multiple. Trades at an elevated EV/EBIT multiple on 2025's depressed operating income.
• Expected return. The base case gives an annual return near the 10% bar or below, depending on how the backlog performs.
• Multiple sensitivity. Value depends on the return on capital sustainably exceeding the 10% bar again.
• Decline in the stock. The stock fell with no dominant negative catalyst identified beyond 2025's volatility.

Each margin over sales, year by year: historical (solid line) → projection (dotted).

• ✕ ROIC exceeds the cost of capital (~10%)
• ✓ CFROIC backs up the ROIC (106%, cash vs. accruals)
• ✓ Healthy balance sheet (low corporate debt)
• ✓ Durable competitive moat (multiple advantages)

• Cash generation. TTM free cash flow (~US$379 million) recovered ground after a weak 2022.
• Return on capital. ~8.9% today, below the 10% bar.
• Reinvestment runway. The data center backlog offers a concrete reinvestment runway into 2027.
• Earnings quality. 2025 and 2026 earnings carried non-recurring items in both directions (legal, tariff).

Annual levels from the official filing (10-K); the % over each bar is the year-over-year (YoY) growth vs the prior year.

The data center backlog is the most relevant leading driver: it is contracted, not extrapolated, revenue, and anchors the C&I trajectory toward 2027 (§5). Sales by segment and residential TAM penetration show the two structural engines: cyclical acceleration in C&I and a long runway still largely untapped in Residential.

The % are the annual (year-over-year) growth: each year —historical and projected— vs the prior one; the TTM (trailing 12m) vs the TTM of a year ago, to avoid overlapping windows. The historicals are exact figures from the official filings; the projected years come from the year-by-year model (the intermediate years without their own series are interpolated between the anchors). The projected columns (+1y…+5y) are 12-month windows counted from the TTM close (30-jun-2026): the projection starts from the most recently reported data, not the fiscal year. The projected base is realistic and unbiased — the risk discount is applied at the end, via the required return. The rationale for each metric is in the (i).

• C&I / data centers. Guided to grow in the low-thirties percent range in 2026, with visible backlog into 2027.
• Residential. Guided to high-single digits, after a soft second half of 2025.
• International. Grows slower than the domestic business, without being a clear driver.
• Subscriptions. Recurring remote monitoring revenue, still a minor share of sales.

• Demand recurrence. Partly depends on unpredictable weather events; structural demand grows with penetration of the addressable market, currently low.
• Product differentiation. Broad portfolio (800W to 3,250kW) and connected ecosystem, but competes in a market with established substitute products.
• Pricing power. Limited ability to raise prices without resistance; margins depended in part on the one-time 2026 tariff refund.
• Operating leverage. The second-quarter 2026 margin jump shows real operating leverage as C&I volume scales.
• Recession behavior. The generator replacement cycle is discretionary; a consumer recession can postpone residential purchases.

Not all debt is equal: only the structural needs refinancing; the rest is operational (self-liquidating).

Structural debt is what is exposed to the contraction phase of the cycle; operational debt (leases, matched funding) self-liquidates with the business.

• !Leverage (net debt / EBITDA)Net debt / EBITDA 1.5x
• !Interest coverage (EBIT / interest)6.5x
• –Liquidity (current ratio)no data
• ✓Cash quality (CFROIC vs ROIC)CFROIC backs 106% of ROIC
• ✕Value creation (ROIC − 10% bar)-1pp
• ✓Malinvestment test (capex vs incremental ROIC)Capex/D&A 0.8x — no over-investment
• !Float / working capitalConsumes cash $0 bn (positive WC)
• ✓Dilution (SBC % of revenue + shares)SBC 1.1% of revenue

A traffic-light interpreted by the method (not generic): float (negative WC) adds up, capex is judged by incremental ROIC (malinvestment test), and a lender is not subjected to corporate solvency. The (i) shows the derivation of each number.

• Leverage. Total debt ~US$1,213 million vs. equity ~US$2,878 million; ample interest coverage.
• Liquidity. Cash ~US$265 million, down after the Enercon acquisition and the legal settlement.
• Maturities. Long-term debt predominant, with a manageable current portion.
• Contingencies. The 2025 product liability settlement was in principle; potential additional impact from ongoing litigation.

Who owns the shares — the alignment and whether there is a controlling shareholder.

• Capital allocation. Consistent buyback track record between 2022 and 2024, paused in the trailing year due to the Enercon acquisition and the 2025 legal settlement.
• Alignment. The CEO has held the combined CEO and Chairman roles since 2016; ownership by the leadership group is limited (~2.4%).
• CEO track record. Aaron Jagdfeld spent 15 years at the company before becoming CEO in 2008, trained at Deloitte and as an accountant.
• Transparency. The company precisely details non-recurring charges (legal, tariff) in its non-GAAP reconciliations.

• The 2025 result was depressed by US$158 million in legal and regulatory provisions, including the US$104.5 million settlement for product liability on portable generators — a non-recurring charge that inflates that year's accounting multiple.
• The second half of 2025 had particularly low power-outage activity, a cyclical pattern that temporarily depresses residential demand.
• The data center opportunity is recent — the second hyperscale contract closed in the second quarter of 2026 — and is not yet fully reflected in reported results, even though the backlog already anticipates it.

Even so, the return on capital remains below the 10% bar and much of the 2026 margin improvement stems from a one-time tariff refund, not a sustained structural improvement. No margin of safety: at this price capital is preserved, but it is not bought below its value.

The annual return (CAGR at 5 years) in each scenario, with the total period return below — the margin of safety made visual: upside range wide, downside range narrow.

Even in the bear scenario, the return holds at -13%/year (-50% total): the margin of safety protects the downside. The bull (+14%/year, +89% total) exceeds it comfortably — a favorable asymmetry, with a narrow downside range and a wide upside range.

• Weather cyclicality. Demand depends on unpredictable power outages; quiet periods depress residential sales.
• Supplier concentration. Large engines for data centers depend on single-source suppliers.
• Data center execution. Contracts carry cancellation clauses and strict deadlines; the market is difficult to project.
• Tax policy. Accelerated phase-out of solar and storage tax credits hits clean energy products.
• Geographic concentration. Much of manufacturing sits within a 100-mile radius in Wisconsin.

Each thinker's analytical framework applied to our data.

• Buffett / Graham Quality + margin of safety

  Fails the quality gate: ROIC 9% does not clear the 10% bar.

• Peter Lynch Growth at a reasonable price (GARP)

  A cyclical growing 9% at a multiple/growth of 3.7 → expensive for its growth.

• Joel Greenblatt Cheap and high-return (Magic Formula)

  Earnings yield 3% (EBIT/EV) + ROIC 9% → falls outside the Magic Formula.

• Howard Marks Perception vs reality + cycle

  The price discounts 14% vs our 9%: priced for perfection, no favorable mispricing.

• Seth Klarman Capital protection (bear scenario)

  Bear-scenario floor -13%/yr over 5y (material loss) → risk of permanent capital loss.

• Pat Dorsey Moat strength (Five Rules)

  A narrow moat, stable; sources: switching costs, efficient scale, intangibles, cost advantage → partially passes the Five Rules.

• Aswath Damodaran Expectations implied by the price

  The price demands 14% growth, far above our 9% — heroic assumptions.