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` Analysts: Dylan French dylan-french@uiowa.edu Jack Sannes jack-sannes@uiowa.edu Company Overview Generac Holdings, Inc. designs and manufactures power generation products. Its generators and other engine products serve a variety of end markets, ranging from residential to light commercial and industrial. Generac leads the power equipment market in North America and has seen their international presence grow through recent acquisitions. The company utilizes a variety of distribution channels including independent dealers, wholesalers, distributors and rental companies. Large, unpredictable power outages dictate periods of high growth as consumers tend to seek more power generation products following these events. Stock Performance Highlights 52 Week High $41.56 52 Week Low $26.29 Beta 1.51 Average Daily Volume 617,857 Share Highlights Market Capitalization 2.55B Shares Outstanding 443,805,000 P/E (forward) 24.86 EV/EBITDA 17.53 Gross Margin 35.5% EPS (2015) $1.14 Company Performance Highlights ROA 4.13% ROE 15.87% Inventory Turnover 2.66 Financial Ratios Current Ratio 3.1 Debt to Equity 2.397

Current Price $40.87 Target Price Range $30 - $38 GNRC Generates Mixed Feelings

• Narrow Product Focus – Revenue streams derived

entirely from power generating products, leaving Generac vulnerable to volatility in the industry.

• Competing for Market Share – Low industry

concentration creates competitive environment, placing pressure on specialized companies to perform.

• Favorable Economic Outlook – Infrastructure

spending along with other leading indicators of industrial sector performance reflect optimistic prospects.

• Recent Acquisitions Proving Successful in

Expanding Overseas Presence – Acquisition of Pramac in 2016 expanded international commercial and industrial segment.

• Lack of Power Outages Depressing Sales

Forecasts – Struggles to obtain consistent earnings growth as major power outages have dwindled over past 14 quarters.

One Year Stock Performance1

Krause Fund Research Fall 2016

Recommendation: HOLD November 15, 2016

Industrials Generac Holdings Inc. (NYSE: GNRC)

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We recommend a HOLD rating for Generac Holdings Inc. stock. The company offers upside potential as it attempts to expand its position in the underpenetrated residential standby generator market as well as its international presence through recent acquisitions. Our concerns with the company arise from recent lack of power outages that have historically driven company sales growth. A favorable economic outlook and industry position could, however, push many investors into “buy” territory, but we feel it necessary not to overlook these concerns as they have direct negative impact on Generac’s long-term performance.

U.S. Real Gross Domestic Product Real Gross Domestic Product (GDP) measures the economic value of all products and services produced by an economy in a given period of time. Real GDP controls for price changes (inflation) so as to only reflect changes in an economy’s output. GDP has historically been a leading indicator for economic growth and vitality and as a result, both businesses and consumers within an economy look to GDP to gauge economic conditions.2 U.S. GDP has experienced consistent growth since the downturn in 2008, albeit at levels still below the long run average and target GDP growth rate of 3%. These tepid growth rates suggest that the U.S. economy has recovered from the economic crisis but has yet to restore growth to its historically robust levels. At the start of 2016, GDP continued its slow growth pattern but now appears to be increasing according to the GDP Advance Estimate, which showed that GDP grew at an annual rate of 2.9% during the third quarter of 2016. The pickup in growth is primarily attributed to increasing investment in private inventories, higher exports and federal spending, and increased personal consumption expenditures.2

Source: Bureau of Economic Analysis3

Given that the industrials sector has the highest correlation to the S&P500 (a popular proxy for economic performance), GDP bares significant weight in making our investment decision.4 Despite the surge in GDP growth during the third quarter of 2016, we predict that short-term U.S. GDP growth will remain close to 2% over the next one or two years due to the likelihood of the Federal Reserve raising the Federal Funds rate. Additionally, we believe that GDP growth will be slightly suppressed by low exports due to uncertainty injected into the global economy by Brexit and slowing growth in economies like Brazil and China.5 We predict long term GDP growth will remain around 2% due to the aforementioned factors on top of the U.S. currently experiencing one of its longest economic expansions in history since July 2009. This seems to indicate that we are currently in a semi-mature portion of the business cycle and that substantial increases or decreases in GDP growth are unlikely. U.S. Capacity Utilization

Capacity utilization is the percentage of resources used by corporations and factories to produce goods in manufacturing, mining and electric and gas utilities for all facilities located in the U.S.6 “Figures from the monthly calculation attempt to conceptualize the idea of maximum output by reflecting how much more manufacturers can produce without incurring additional costs and by deduction, how much consumer demand they will be able to meet in the future.6 Results from September readings of capacity utilization came in at 75.4% of capacity, inching ten basis points higher from August readings of 75.3% but still one percentage point below the prior-year’s September reading of 76.4%. Generally speaking, an 80% capacity utilization is considered a strong reading, indicating that quantity demanded closely resembles quantity supplied. Capacity utilization figures are especially important to companies in the capital goods industry group. Capacity utilization typically increases when aggregate demand increases, requiring manufacturers to ramp up production in order to meet the increased demand and maximize sales. Our team predicts capacity utilization to pick up

Executive Summary

Macroeconomic Outlook

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significantly over the next 2-3 years to around 79-81%, driven primarily by rising demand for construction equipment to accommodate new infrastructure projects.

Source: St. Louis Fed6

Government Spending Government funding for large-scale infrastructure projects have historically played a central role in stimulating growth within the industrials arena. Infrastructure projects require a range of industrial-type companies from construction and transportation to machinery and waste disposal. As a result, the benefits of one infrastructure project disseminates throughout the industrials sector. President elect Donald Trump’s proposal to spend over $1 trillion on U.S. infrastructure has already sent growth expectations for industrials companies through the roof. The Industrials S&P 500 index spiked over 10% since the election, reflecting investor’s optimism toward the industrials sector.7

Source: S&P Capital IQ8

Purchasing Managers Index The Purchasing Managers Index for October 2016 was reported at 51.9%. This indicator demonstrates the overall strength of the manufacturing economy. Any reading above 50 percent signals that expansion is occurring within the manufacturing sector, and any reading below 50 percent suggests contraction. Additionally, when the indicator is

above 43.2% it suggests that the overall economy is expanding.9

Month PMI®

Month PMI®

Oct 2016 51.9

Apr 2016 50.8

Sep 2016 51.5

Mar 2016 51.8

Aug 2016 49.4

Feb 2016 49.5

Jul 2016 52.6

Jan 2016 48.2

Jun 2016 53.2

Dec 2015 48.0

May 2016 51.3

Nov 2015 48.4

Average for 12 months – 50.6 High – 53.2 Low – 48.0

Source: Institute for Supply Management9

We think that the industrials sector, and specifically the electrical equipment industry, will follow the historical trend of the past 12 months’ data of the PMI. Given the average being 50.6%, we believe that we are in a “two steps forward, one step back” growth pattern. Month to month there will be times of contraction, but overall in the next few years we think that there will be growth in manufacturing. For the short term, we believe there will be heightened levels of growth in manufacturing than normal. Respondents in the most recent report are optimistic in the short term, as the machinery respondent specifically was quoted as saying, “due to the hurricane and other storms, our business is up significantly.”9 With an industry like electrical equipment having growth opportunities coming from power outages and storms, we see this report as positive confirmation of short-term growth prospects and validation of our long-term forecast for the sector. Capital Markets Outlook Given the analysis of current and forecasted economic conditions, we predict capital market conditions to have a bright future. Regardless of the validity of Trump’s proposed infrastructure initiatives, we feel that the industrials sector has shown recent signs of growth that will continue into the future. Due to the strong correlation between the vitality of the economy and its corresponding positive effects on the industrials sector, we believe the industrials sector presents tremendous growth opportunities.

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S&P 500IndustrialsS&P 500

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Industry Overview Generac operates within the electrical equipment industry, a constituent of the capital goods industry group which all lay under the broader umbrella of the industrials sector. Firms within the electrical equipment sub-industry manufacture three general types of products: electrical components and equipment, heavy equipment and automation equipment.4 Electrical components and equipment include heating ventilation and air conditioning (HVAC) products, light fixtures and switchboards. Heavy electrical equipment comprises products used to create or alter the flow of energy such as generators, motors and transformers. Lastly, automation equipment involves the use of robotics, drive systems, software and other electronics used to increase efficiency in the workplace.4

Electrical equipment that utilizes alternative energy sources, such as solar panels and wind turbines, have also become an increasingly popular product within the electrical equipment industry. The chart below demonstrates the product breakdown of the electrical equipment industry as a proportion of total revenues in the year 2016. Electrical equipment is comprised of four main product groups, including from largest to smallest switches (30.6%), motors and generators (28.0%), relays and industrial controls (26.9%), and transformers (14.5%).10

Source: IBISWorld10

Industry Leaders & Followers The electrical equipment industry has very few companies dominating market share. The chart below demonstrates the market share breakdown, with General Electric having the

largest market share of one player (11.0%), but 72.2% of the total market share is controlled by companies holding less than 5% of total market share.10 A lack of a dominant player in this space comes from a wide variety of specialized products being offered within each broad category.

Source: IBISWorld10

We looked into comparable metrics of the three major players (GE, ETN & SU.PA), along with two more specialized companies within the electrical equipment space, specifically within the motors and generators product segment. By doing so, we were able to look more closely into how specialized companies hold up next to the larger players within the electrical equipment industry.

Ticker Market Cap

P/E (Current)

Profit Margin %

GE 262,118.5 31.46 7.4 ETN 29,956.7 14.9 10.2 SU.PA 36,524.6 23.28 8.3 BGG 837.8 14.25 3.3 GNRC 2,552.2 24.86 7.7

Source: Bloomberg Terminal11

Market capitalization paints the clearest picture as to size of the companies we are comparing. This metric demonstrates the market value of the outstanding shares of the firm that are publicly traded. As seen above, there is a large disparity between companies like General Electric (GE) and Generac (GNRC). Other metrics give a better idea of how each company operates relative to each other.

The price-to-earnings ratio gives investors an idea what kind of return they can expect on their investment of purchasing a share of each company.12 For example, based upon the P/E ratio for Generac (GNRC) above, equity investors are willing to pay $24.86 for every $1 of earnings Generac generates. Additionally, a higher price-to-earnings ratio relative to others suggests that equity investors see more potential growth of those firms, and therefore are willing to pay more. Generac has the second

Industry Analysis

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highest price-to-earnings ratio out of the comparables we have chosen.

Margin analysis gives a better idea of what portion of revenues trickle down into gross profit and into earnings that get reinvested back into the company. Gross margin demonstrates the portion of revenues that remain after taking out the cost of goods sold. The industrials sector itself depends heavily on capital expenditures, whose associated expenses are mostly contained within cost of goods good. A higher gross margin percentage indicates that a company has lower input costs for producing its products. Generac has the second-highest Gross margin percentage relative to its peers.

Ticker Gross Margin % EV/EBITDA

Inventory Turnover

GE 21.6 35.1 4.36 ETN 32.2 11.61 6.02 SU.PA 37 12.92 5.54 BGG 20.5 9.81 3.78 GNRC 35.5 17.53 2.66

Source: Bloomberg Terminal11

The metric of inventory turnover is an industry specific measure that helps understand how effective a business is in selling its products. Within the electrical products group, companies generate revenue based upon their ability to sell their inventory. A lower inventory turnover ratio suggests that a company is having difficulty in selling their inventory, potentially resulting from lack of demand for their product or lack of visibility in the marketplace. Generac has the lowest inventory turnover relative to its selected peers, suggesting that their power generators take longer to sell relative to other products sold by its peers.

Recent Developments & Trends Electric Power Consumption Consumption of electric power has decreased dramatically from pre-economic crisis highs. After experiencing a slight uptick in 2010, electric power consumption has since floundered. The U.S. has historically been one of the largest consumers of electric power across the globe. The average amount of electric power consumption per person in the U.S., as measured in kilowatts per capita, during 2013 was nearly 13 thousand kWh. That’s compared with the world average of only 3.1 thousand kWh per capita, proving the U.S. as a leader in the arena of electric power consumption.13 Our team believes that electric power consumption in the U.S. will increase dramatically over the

next five years until it reaches pre-great recession levels. Over the long-term, we see electric power consumption growing at accelerated rates as oil reserves deplete and whole societies turn to electricity and other alternative sources for energy.

Source: World Bank13 Decline in Power Outages

Power outages in the U.S. have remained at ultra-low levels over the past three years. Lack of extreme weather events coupled with advances in technology are the main factors attributing to such minimal hours without power.14 As the graph demonstrates, power outages, as measured in total hours without power, in the U.S. have been nearly cut in half relative to the 7-year baseline average (excluding major events). Our team believes that power outages will remain low and will likely decrease further as demand for dependable back-up power generation drives technological advancement in the industry.

Source: Generac Investor Presentation14

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Porter’s Five Forces Threat of New Entrants: Moderate

Moderate barriers to entry within the industry create mild threats of new entrants.10 Our team believes the large upfront investment and expensive technologies is partially offset by relatively low requirement for ongoing capital investments. After the initial investment, cheaper cost environments abroad can be utilized, allowing for discounted maintenance costs.

Competitive Rivalry: High

According to IBIS World, companies within the industry compete on the basis of several factors, including product quality and performance, range of products and services offered, customer service and price.10 As mentioned earlier, there is low concentration within the electrical equipment industry, creating a broad range of competitors. We predict competition to increase over time as more products are manufactured overseas where cheaper costs of labor allow for lower priced products.

Players in the industry vary from large conglomerates with established industrial brands, such as Caterpillar (NYSE:CAT), to smaller niche companies like Generac Holdings. When disparities across company sizes like this exist, smaller companies face the risk of larger companies undercutting prices. Firms with more financial resources and greater economies of scale have the ability to sell products at lower prices. Such an advantage allows larger firms to force its smaller competitors to accept slimmer margins.

Bargaining Power of Suppliers: Low

Bargaining power of suppliers in the industry are low and will remain low. Suppliers for electrical equipment companies consist of commodity (procurement companies) companies and component vendors. Since these inputs are widely available to the public, the industry does not have to worry about one supplier driving up prices, as companies could simply look elsewhere for these inputs. Also, there is little threat of forward integration from suppliers. A commodity supplier would not be interested in purchasing a power generation company, as there is little benefit to them in wanting to operate in such a specialized space. Staying general in supplying commodities to a wide variety of businesses would be most advantageous to the suppliers, leading us to believe that they pose little threat to the electrical equipment industry.

Threat of Substitutes: Low

Power generation has very few substitutes. When consumers need to generate power, they typically do not have many options to go to besides what is readily available

to them. As technology becomes more and more integrated with every sector, consumers will need to rely even more on having dependable power to operate their devices. This dependability is a huge positive for the industry, and points to stability for continued growth in both the short and long term.

Bargaining Power of Buyers: High

Given the discretionary nature of many products within the industry, buyers have high bargaining power. Power generating products do not have many substitutes, but many consumers do not think they necessarily need to have them. If a consumer does not live in an area where power outages are frequent, a generator may not be something they would consider buying. Additionally, the price point for generators is quite high, which can turn a consumer away from purchasing. A home backup generator sold by Generac can be priced as high as nearly $5000. A consumer may think a purchase like this is unnecessary, as they may never need to use a backup generator if their power never goes out.

Catalysts for Growth & Change Infrastructure Spending

President-elect, Donald J. Trump, has set forth an ambitious infrastructure spending initiative. Pledging to inject over a trillion dollars into infrastructure projects over the next 10 years has spurred growth expectations throughout the industrials sector, including the electrical equipment industry. Many players within the industry garner a significant amount of revenues from large scale infrastructure projects, whether it’s from the mobile generators that construction companies require to power on-site operations or from transformers needed to build new power lines. Although uncertainties remain over where the trillion dollars’ worth of funding will come from, infrastructure spending will nonetheless contribute to newfound growth moving forward.7

Consumer Sentiment

Consumers’ expectations regarding their future financial position are key in growth for the electrical equipment industry. Many of the products sold within the industry for residential use have high price tags, and consumers would view the purchase as an investment in their home. The consumer sentiment index is a survey done each month that asks consumers some of the following questions: “Do you think you will be better off financially a year from now?” and “Do you think now is a good time for people to purchase major household items?”15 Tracking this indicator

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is key for companies within the industry to understand consumers’ expectations going into the future.

The most recent reading of the consumer sentiment index had the index at 91.6 for early November. This reading was the highest level since mid-2016 and is slightly higher than the 2016 average of 91.1.15 We think this high reading suggests that consumers are going to be more likely to purchase generators and other large electrical products for their homes going forward. Companies in this space can expect growth from more consumer purchases as a result.

General Information Generac Holdings, Inc. is both a designer and manufacturer of power generation products. Their generators and other engine products serve a variety of end markets, ranging from residential to oil & gas and construction.16

Generac leads the power equipment market in North America, and has recently seen their international presence grow. Generac currently owns roughly 75% of the domestic home standby generator market. After the acquisition of Pramac earlier in 2016, Generac now has over 20% of their revenue coming from outside of the United States and Canada on a pro-forma basis.14

Source: Generac Investor Presentation14

The company sells its products through independent dealers, wholesalers, distributors and rental companies. Large, unpredictable power outages dictate their business cycle, as consumers have high demand for power generation products following these events. The third quarter 2016 earnings report shows that Generac’s Net Income increased 27.4% to $367.4 million compared to the same quarter in 2015.16

Product Lines The majority of Generac’s revenues come from the sales of residential power generators. Comprising 51.2% of total net sales in 2015, the generators include residential standby generators, portable gas-powered generators, as well as power washers and outdoor power equipment. The standby generators vary in terms of prices, with manufacturer’s suggested retail prices (MSRPs) ranging from $1,799 to $16,199 depending on the desired output.16 Standby home generators are permanently installed in the home and have a capability for Generac’s Home Link service, where customers can view the status of the generator from their electronic devices.16 The portable gas-powered generators have capabilities to power recreational equipment in addition to being sources of backup power. Power washers and outdoor power equipment offer a differentiated product line from the generator lines, but they are not the main focus of the company.16

Commercial & Industrial products comprise most of the remaining revenues that Generac brings in. Light commercial generators provide backup power options for small and mid-sized businesses, including gas stations, restaurants and pharmacies. Industrial generators are used as emergency backups for telecom, datacom, and commercial offices among others. Approximately 42% of Generac’s net sales in 2015 derived from commercial and industrial products.16

Source: Generac 2015 Form 10-K16

Marketing Strategy Generac markets its products by advertising them as insurance in addition to the insurance policy a customer already possesses. The argument put forth is that even if your business has suffered damages through a disaster already covered by an insurance policy, the business must forgo any revenues they would have normally gotten from

80%

20%

Domestic vs. International Sales (Pro-Forma 2016)

Domestic International

Residential Products

51%

C&I Products

42%

Other7%

Generac Product Line Breakdown(% of 2015 Sales)

Company Analysis

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operating, as they do not have power to keep the doors open. Generac advertises to the consumer that they have a wide range of options for backup power, depending on the needs of the business. They provide a “Business Continuity Plan” on their website, as a means to start a relationship with a customer and help them find the generator that is right for them.18 Analysis of Recent Earnings Generac’s 2016 third quarter earnings showed an EPS of $0.40, coming in five cents above EPS consensus estimates.19 The beat in Q3 EPS estimates, driven primarily by strong international sales attributed to the recent acquisition of Pramac, still remains nearly 15% below the 2015 Q3 EPS of $0.49. Our team believes struggles to fully integrate recent acquisitions remain the primary factor for the drag in recent earnings. For example, 2016 costs associated with selling & service and general & administrative during the three months ended September 30 came in 28% and 37% higher, respectively, from the same period one year earlier. However, our team feels that EPS figures will recover over the near term as recent acquisitions adopt Generac’s lean cost business model and international sales growth continues. Sales growth moving forward into Q3 and beyond will likely be driven primarily by residential power generators as households anticipate an abnormally cold winter with elevated snowfall.20

Source: Accuweather.com20

Homeowners will want to ensure that they have heat and power throughout the winter months, especially in rural areas. Accuweather predicts that areas from the Midwest to the Northeast will experience abnormal cold, snowfall, or a combination of the two.20 These areas contain a large amount of rural citizens, who may be more self-reliant in

times of abnormal weather conditions. As of 2015, the number of people living in “non-metro” counties within the US was about 46.2 million as of July 2015.21 The chart below shows the growth of these rural areas over the past 5 years, especially where harsh winters are predicted.

Source: U.S. Census Bureau21 Competitive Environment The market for generators contains a broad range of competitors. Generac's competitors range drastically in size from large, diversified companies like Caterpillar (NYSE:CAT) to smaller niche companies like Briggs & Stratton (NYSE: BGG).22 Generac is the only market participant with a primary focus on power generators, specifically those with broad applications across various end markets. Larger companies competing in the same space, such as Caterpillar and Honda Motors (NYSE: HMC) are more diversified, where generators are strictly a small segment of their business model. Although they may have more capital to invest into generator products, these companies focus largely on their other product segments. Generac's core focus on power generation offers flexibility with manufacturing, and allows them to maintain an innovative edge. Generac’s large scale of operations along with flexible applications of generators position Generac to remain competitive moving forward.

Source: ThomsonOne22

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Overall sales over the past year compared to the previous year have fared the best for Generac compared to selected competitors. Generac’s year over year sales ratio was the highest at 1.01 (101%), signifying that its ability to produce high quality generators have kept sales consistently high compared to its more diversified competitors. Catalysts for Growth/Change Natural Disaster & Extreme Weather Unexpected, large scale natural disasters can have a large positive impact on the growth of Generac. Hurricane Sandy, which occurred on October 29th, 2012, caused over 4.5 million people in the New York and New Jersey area to be without power.23 During the year in 2012, Generac showed a 48.5% increase in sales, which spilled over into the following year. The year 2013 showed lesser growth, but growth nonetheless at a solid 26.31%. Natural disaster like Hurricane Sandy heightens awareness of a need for power generators.24 We believe this behavior was responsible for Generac's revenue growth in 2012 and 2013. As shown by the graph, Generac outperformed the S&P 500 before, during, and after Hurricane Sandy struck.

Source: Yahoo! Finance26

The threat of the disaster itself will raise demand for Generac's products as more people flee to retailers for generators. When the storm is imminent, demand will peak as consumers will purchase generators out of a scarcity mentality. After the storm, consumers in surrounding but unaffected areas will see the results of the storm, and then be led to purchase a generator as a sort of an insurance policy for their own home. Because of these consumer behaviors, Generac typically experiences revenue growth in both their residential and C&I product lines, as homeowners and businesses seek to avoid power outages in emergency situations. We predict Generac’s sales in Q3 and Q4 to reflect a similar trend as more consumers purchase backup generators in anticipation of Hurricane Hermine, in line with other analyst predictions.25

Durable Goods Spending & Consumer Confidence Strong spending on durable goods by both residential and small business owners plays a pivotal role in Generac's sales.27 With over 90% of Generac's revenues coming from sales of residential and C&I power generators, optimistic households and business-owners typically translate to greater sales.

Source: Bloomburg Terminal11

When consumers are confident about the future of the economy, they are more likely to make larger purchases (i.e., power generators) for their homes. Small businesses tend to be even more sensitive to economic outlook as they have less disposable income to invest. The data above shows the consumer confidence level along with the index of small business optimism. Both are on the rise since the low point in the recession of 2008-2009, with the small business optimism being slightly more volatile over that time span. We think this rise suggests that sales growth will continue, validated by the strong increases in sales thus far in 2016. SWOT Analysis Strengths Generac offers the widest range of power generators in the market, with over 50 different home backup generators offered currently.16 Each generator has a different kilowatt outage as well as being customizable with levels of noise output and being eco-friendly. With this wide selection and capabilities to produce a variety of generators, we believe Generac will continue to lead the market for years to come. Consumers will be able to purchase a generator that fits their specific needs. Weaknesses Due to a lack of a diversified product base, an overall decrease in demand for power generators could significantly hinders sales. Although a small portion of

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their business comes from power washers and other outdoor power equipment, that segment's revenues alone would not be sufficient to keep the business afloat. Additionally, Generac’s larger, more diversified competitors have more capabilities to cut costs and lower prices of the generators they sell since they have revenues coming from other products. If competitors decided to slash selling prices, we think that Generac may struggle to compete. Opportunities We feel that a growth of the residential standby generator area of Generac's product line could provide the largest growth opportunity for the company. With only about 3.5% of homes in the United States currently owning one of these generators, a large customer base exists that Generac could direct its efforts to expand.16 Increases in the consumer sentiment index discussed previously suggests that growth of this product line is feasible for Generac to accomplish going forward.

Source: Generac Investor Presentation14

The graph above shows the percentage of homes that currently have portable generators as well as home standby generators. Generac believes that each additional 1% penetration of the standby generator market will result in an additional $2 billion of market opportunity.14 Threats Large growth in Generac's sales as subject to randomly occurring natural disasters. Forecasting disasters presents a challenge to Generac; in some years, disasters are much less frequent. The business model used by Generac needs to account for the volatility of these disasters, and strategic

planning must not depend on revenue jumps from these events. Investment Positives • Sole focus on power generation products allows for a

sustainable competitive position within the industry. • Recent acquisitions have proven effective in expanding

international footprint. • Low penetration rate in the addressable residential

generator market provides significant growth opportunity.

Investment Negatives • Lack of diversified product mix creates significant

exposure to decreased demand within the industry • Inability to plan for growth caused by unexpected

power outages hampers growth certainty. • Short historical track record since IPO in 2010 poses

challenges for accurate forecasts.

We used four different valuation methods to arrive at our consensus that Generac Holdings is overvalued. The models used were a Discounted Cash Flow model, Economic Profit model, Dividend Discount model, and relative valuation using comparable companies. Using our analyses, we concluded that Generac have a HOLD rating with an intrinsic stock price below the current trading price of $40.87. Through our forecasts and model outputs, we believe that our DCF model is the most accurate valuation method for GNRC. Being a small, young company in a growth phase, we chose a longer forecast horizon to demonstrate when we believe they will achieve steady long-term growth. Since they currently do not pay a dividend and have no true comparable companies, we found the intrinsic DCF model to be most effective in our valuation. Revenue Growth Generac reports its revenues by only one stream: power generating products. They also give a breakdown of their sales mix by percent of total revenue. However, Generac does not provide guidance on profit margins for each of the residential, commercial & industrial, and other products segments. As a result, we were only able to forecast total

Valuation Analysis

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sales into the future, as well as product mix based upon guidance in their most recent investor presentation. We believe that Generac will grow their commercial & industrial segment to 45% of total sales in 2021 and in the years thereafter, up from 41.6% at year-end 2015. In line with our industry outlook and management guidance, we believe an uptick in infrastructure projects will drive commercial & industrial sales higher immediately in 2017 and into the future. Additionally, we have chosen to forecast our growth of total sales without any severe power outages taking place in the future. Management has noticed that there has been an overall lack of power outages over the last 14 quarters. To help manage investor expectations, our forecasts incorporated this trend indefinitely into our forecast period. We believe this decision demonstrates the company’s most reliable revenue growth expectations going forward. We expect that sales will grow by 9.1% in 2016 as a result of continued high levels of growth post-IPO in 2010. We believe Generac will reach a steady–state growth rate of 2% indefinitely by 2025, capturing the taper in growth as the company matures. Cost of Goods Sold as Percent of Sales As with most industrial companies, cost of goods sold (COGS) comprises a significant portion of Generac’s overall cost structure. We forecasted COGS at 61% of total sales, which is slightly below the five-year historical average of 62.1% of sales. We believe that as Generac develops its business and makes operational improvements, the company will drive down input costs of its products. Capital Expenditures Contrary to the typical industrial business, Generac requires relatively low levels of capital expenditures (capex). These low levels are a result of more manufacturing facilities relocating overseas to low labor cost environments and a stronger U.S. dollar.28 Our forecasts for capex maintain a fixed increase of $25 million each year through 2025. We chose our forecast according to five-year historical averages. Selling & Service Expenses Generac’s market strategy plays a key role in their operations and we chose to forecast selling & service expenses based upon marketing’s importance going forward. The company advertises that an individual can fill out a form on their website outlining their specific needs and then Generac will help outfit them with the correct generator to fit their needs. We believe that this relationship building marketing tool is important to bringing in new

business, as Generac tries to increase penetration in to the home standby generator market. As such, we have maintained selling & service expenses as 9% of sales going forward through our forecast period, in line with five-year historical averages. As we predict sales to grow, Generac will need to have consistent funding allocated to their selling & service arms of their business to keep customer relations strong. Weighted Average Cost of Capital (WACC) We calculated our WACC of 8.30% using our capital structure of 72.58% equity and 27.42% debt. We anticipate that Generac will maintain this capital structure indefinitely into the future. Generac’s cost of debt and cost of equity were calculated as such: Cost of Debt To calculate our cost of debt, we utilized the 30-year risk free rate on the US treasury yield and added the term loan adjustable LIBOR rate from the Generac 2015 Form 10k, as Generac only has privately-held term loans on their balance sheet.16 The sum of these two figures resulted in a pre-tax cost of debt of 6.13%, and then after multiplying that cost of debt by one minus Generac’s marginal tax rate of 38.5%, we arrived at our after-tax cost of debt of 3.77%. Cost of Equity We used the Capital Asset Pricing Model (CAPM) to calculate our cost of equity. To use the CAPM formula, we had to find three different variables: beta, the equity risk premium (ERP), and a risk-free rate. To calculate beta, we used the average of the company’s raw weekly one-year and two-year betas, found from a Bloomburg terminal. After doing so, we were satisfied that our calculated beta of 1.51 accurately reflected Generac’s current risk environment. We arrived at our equity risk premium of 4.89% using Damodaran’s implied equity risk premium as of November 1, 2016. Lastly, our risk-free rate of 2.63% reflects the 30-year US Treasury yield previously used in finding our cost of debt. We then multiplied our beta by the equity risk premium and then added our risk-free rate, resulting in our cost of equity of 10.01%. Valuation Models Discounted Cash Flow & Economic Profit Model We retrieved identical intrinsic stock prices using both the discounted cash flow (DCF) and economic profit (EP) models. Using the value drivers net operating profit less adjusted taxes (NOPLAT), free cash flow (FCF) and return

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on invested capital (ROIC), we arrived at the value of the company’s operating assets after discounting each year’s cash flows and the continuing value at Generac’s weighted average cost of capital (WACC). From there we added non-operating assets, such as excess cash, and subtracted out all other claims on the company’s operations, such as debt and the present value of the company’s employee stock options (ESOP), to arrive at the total equity value. After dividing by total shares outstanding and accounting for the fraction of the year 2016 that has already passed, we found an intrinsic stock price of $32.33 per share as of November 14th, 2016. Similar to the DCF model, the EP model incorporated projections of the company’s economic profit, rather than FCF, discounted back to present day by the WACC to arrive at the value of the company’s operating assets. We then removed all non-equity claims to determine the equity value and intrinsic share price for Generac. Dividend Discount Model (DDM) The Dividend Discount Model calculates the equity value for a company based upon the present value of all of its expected future dividends and future expected stock price over a specified period of time. We calculated Generac’s future stock price projecting the EPS number in the CV year of 2025 of $3.62, and then multiplying that by the projected price-to-earnings multiple in that same year. We were unable to project any dividends over our forecast horizon. Generac does not pay consistent dividends, only a one-time dividend payout in 2013. As a result, we found our intrinsic stock price per share by discounting the future stock price to present day. After adjusting for the portion of 2016 that has elapsed, we found the intrinsic stock price for Generac as of November 14th, 2016 to be $16.81. However, since Generac does not pay a consistent dividend, we do not believe this valuation method to be reliable compared to the DCF and EP models. Relative Valuation In our relative valuation model, we chose to compare Generac to a group of peers who management views as competitors. Since Generac is unique in only producing power generating products, no true comparable company exists for this analysis. In our analysis, we found the average price-to-earnings and enterprise value-to-EBIT multiples for our set of competitors and then multiplied each by Generac’s EPS and EBIT figures for 2016 and 2017, respectively. Using the peer average price-to-earnings multiple, we found Generac’s implied stock price of $41.35 for 2016, and $40.34 for 2017. Likewise, using the peer average enterprise value-to-EBIT multiple, we found Generac’s implied stock price of $32.45 for 2016 and $27.36 for 2017. Since Generac does not have any true comparable companies, our group has determined that the

intrinsic valuation methods of DCF and EP are most accurate in calculating Generac’s intrinsic price per share. Sensitivity Analysis For our sensitivity analysis, we wanted to see how significant small changes within our assumptions would affect our model as a whole. We compared beta with CV growth of NOPLAT, beta with equity risk premium, cost of goods sold as a percentage of sales with the marginal tax rate, selling & service as a percentage of sales with WACC, and the pre-tax cost of debt with CV growth of ROIC. Beta was an assumption that was extremely noteworthy in our analysis. Due to the relatively high beta for Generac compared to its selected peers, we wanted to demonstrate fluctuations in stock price caused by marginal changes in beta. Generac’s stock price moved from $32.33 to $26.66 when beta was increased by 24 basis points relative to equity risk premium. Since Generac’s capital structure is so heavily weighted on equity, small increases in beta within the Capital Asset Pricing Model can cause large decreases in stock price. Next, we examined the impact on the company’s stock price from incremental changes its WACC. Increasing WACC 1.2 percentage points to 9.5% resulted in a dramatic drop in stock price to $24.36 per share. When compared with the intrinsic value of $32.33 that we calculated using our original WACC number of 8.30%, we clearly witness the significant impact that WACC has on our stock price since it is incorporated into every number that needs to be discounted back to present day.

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Important Disclaimer This report was created by students enrolled in the Security Analysis (FIN:4250) class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

Generac Holdings Inc.Revenue DecompositionIn thousandsFiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E (CV)Sales 1,485,765 1,460,919 1,317,299 1,436,559 1,522,753 1,598,890 1,662,846 1,729,360 1,798,534 1,861,483 1,917,327 1,974,847 2,014,344

% Growth 20.83% -1.70% -10.90% 9.1% 6.0% 5.0% 4.0% 4.0% 4.0% 3.5% 3.0% 3.0% 2.0%

Percentage Breakdown

Residential Products 56.8% 49.4% 51.1% 50.0% 46.0% 44.0% 41.5% 43.2% 44.0% 44.0% 44.0% 44.0% 44.0%Commercial & Industrial Products 38.4% 44.6% 41.6% 42.0% 45.0% 46.0% 47.0% 46.0% 45.0% 45.0% 45.0% 45.0% 45.0%Other Products 4.8% 6.0% 7.3% 8.0% 9.0% 10.0% 10.5% 10.8% 11.0% 11.0% 11.0% 11.0% 11.0%

Dollar BreakdownResidential Products 843,915 721,694 673,140 718,280 700,466 703,512 690,081 747,083 791,355 819,052 843,624 868,933 886,311

% Growth 19.57% -14.48% -6.73% 6.7% -2.5% 0.4% -1.9% 8.3% 5.9% 3.5% 3.0% 3.0% 2.0%Commercial & Industrial Products 570,534 651,570 547,996 603,355 685,239 735,490 781,538 795,505 809,340 837,667 862,797 888,681 906,455

% Growth 38.97% 14.20% -15.90% 9.2% 11.9% 6.8% 5.9% 1.8% 1.7% 3.4% 2.9% 2.9% 2.0%Other Products 71,317 87,655 96,163 114,925 137,048 159,889 174,599 185,906 197,839 204,763 210,906 217,233 221,578

% Growth 18.88% 22.91% 9.71% 19.5% 19.3% 16.7% 9.2% 6.5% 6.4% 3.5% 3.0% 3.0% 2.0%

Generac Holdings Inc.Income StatementIn thousandsFiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E (CV)Net sales 1,485,765 1,460,919 1,317,299 1,436,559 1,522,753 1,598,890 1,662,846 1,729,360 1,798,534 1,861,483 1,917,327 1,974,847 2,014,344 Depreciation (included in original COGS) 10,955 13,706 16,742 18,075 19,513 21,067 22,744 24,554 26,508 28,619 30,897 33,356 36,011 Adjusted Cost of goods sold (less depreciation) 905,250 930,994 840,607 876,301 928,879 975,323 1,014,336 1,054,909 1,097,106 1,135,505 1,169,570 1,204,657 1,228,750 Adjusted Gross profit 580,515 529,925 476,692 560,258 593,874 623,567 648,510 674,450 701,428 725,978 747,758 770,190 785,594 Selling & service expense 107,515 120,408 130,242 129,290 137,048 143,900 149,656 155,642 161,868 167,533 172,559 177,736 181,291 Research & development expense 29,271 31,494 32,922 28,731 30,455 31,978 33,257 34,587 35,971 37,230 38,347 39,497 40,287 General & administrative expense 55,490 54,795 52,947 57,462 60,910 63,956 49,885 51,881 53,956 55,844 57,520 59,245 60,430 Amortization of intangibles 25,819 21,024 23,591 25,691 26,171 25,407 24,649 25,515 24,752 24,053 23,411 22,823 22,284 Tradenames & goodwill impairment - - 40,687 - - - - - - - - - -Gain (loss) on remeasurement of contingent consideration - 4,877 - - - - - - - - - - -Total operating expenses 218,095 222,844 280,389 241,175 254,584 265,241 257,447 267,626 276,547 284,660 291,837 299,302 304,292 Income (loss) from operations 351,465 293,375 179,561 319,083 339,289 358,326 391,063 406,825 424,881 441,318 455,921 470,889 481,302 Interest expense 54,435 47,215 42,843 59,049 60,672 62,007 95,794 97,104 66,174 67,503 68,768 70,072 71,180 Investment income 91 130 123 174 190 201 211 219 228 237 246 253 261 Gain (loss) on extinguishment of debt (15,336) (2,084) (4,795) (5,223) (5,223) (5,223) (5,223) (5,223) (5,223) (5,223) (5,223) (5,223) (5,223) Other expense, net 1,983 1,462 5,487 2,332 2,332 2,332 2,332 2,332 2,332 2,332 2,332 2,332 2,332 Total other income (expense), net (72,749) (35,013) (56,578) (66,430) (68,037) (69,360) (103,137) (104,439) (73,501) (74,820) (76,077) (77,373) (78,474) Income (loss) before provision (benefit) for income taxes 278,716 258,362 122,983 252,653 271,252 288,966 287,926 302,386 351,381 366,498 379,844 393,515 402,828 Provision (benefit) for income taxes 104,177 83,749 45,236 97,271 104,432 111,252 110,851 116,418 135,282 141,102 146,240 151,503 155,089 Net income (loss) 174,539 174,613 77,747 155,382 166,820 177,714 177,074 185,967 216,099 225,397 233,604 242,012 247,739

Weighted average common shares outstanding - basic 68,082 68,538 68,096 68,138 68,180 68,222 68,264 68,305 68,347 68,389 68,392 68,392 68,392 Net earnings (loss) per common share - basic 2.56 2.55 1.14 2.28 2.45 2.60 2.59 2.72 3.16 3.30 3.42 3.54 3.62 Dividends declared per share 5 - - - - - - - - - - - -

Generac Holdings Inc.Balance SheetIn thousandsFiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E (CV)Assets

Cash & cash equivalents 150,147 189,761 115,857 131,025 301,167 477,175 1,165,948 1,349,365 1,035,133 1,256,788 1,485,912 1,723,202 1,965,574 Accounts receivable, net 164,907 189,107 182,185 164,029 173,871 182,564 189,867 197,462 205,360 212,548 218,924 225,492 230,002 Inventories 300,253 319,385 325,375 300,189 318,201 334,111 347,475 361,374 375,829 388,983 400,653 412,672 420,926 Prepaid expenses & other assets 5,358 9,384 8,600 8,532 9,044 9,496 9,876 10,271 10,681 11,055 11,387 11,729 11,963 Total current assets 654,179 730,478 661,372 603,775 802,283 1,003,346 1,713,166 1,918,471 1,627,004 1,869,374 2,116,875 2,373,095 2,628,464 Property & equipment, net 146,390 168,821 184,213 207,969 230,979 253,989 276,999 300,009 323,019 346,029 369,039 392,049 415,059 Customer lists, net 42,764 41,002 39,313 49,883 45,858 42,157 54,375 49,987 45,953 42,245 38,836 35,702 32,821 Patents, net 62,418 56,894 53,772 49,111 44,854 40,965 37,414 34,171 31,209 28,504 26,033 23,776 21,715 Other intangible assets, net 4,447 4,298 2,768 2,768 2,768 2,768 2,768 2,768 2,768 2,768 2,768 2,768 2,768 Trade names 173,196 182,684 161,057 159,952 160,596 160,596 160,596 160,596 160,596 160,596 160,596 160,596 160,596 Goodwill 608,287 635,565 669,719 669,719 669,719 669,719 669,719 669,719 669,719 669,719 669,719 669,719 669,719 Deferred financing costs, net 20,051 16,243 12,965 13,967 13,967 13,967 13,967 13,967 13,967 13,967 13,967 13,967 13,967 Net Deferred income taxes 111,973 55,901 29,862 12,673 5,378 2,282 969 411 174 74 31 13 6 Other assets 1,369 48 964 671 712 747 777 808 841 870 896 923 941 Total assets 1,798,205 1,882,542 1,792,816 1,770,487 1,977,112 2,190,536 2,930,750 3,150,907 2,875,250 3,134,145 3,398,760 3,672,607 3,946,056 LiabilitiesCurrent Liabilities:Short-term borrowings 9,575 5,359 8,594 9,020 9,020 9,020 9,020 9,020 9,020 9,020 9,020 9,020 9,020 Accounts payable 109,238 132,248 108,332 109,783 116,370 122,188 127,076 132,159 137,445 142,255 146,523 150,919 153,937 Accrued wages & employee benefits 26,564 17,544 13,101 18,652 19,771 20,760 21,590 22,454 23,352 24,169 24,894 25,641 26,154 Other accrued liabilities 92,997 84,814 82,540 108,311 114,810 120,551 125,373 130,387 135,603 140,349 144,560 148,896 151,874 Current portion of long-term debt & capital lease obligations 12,471 557 657 500 5,750 5,750 527,000 527,000 Total current liabilities 250,845 240,522 213,224 246,266 265,720 278,268 810,058 821,019 305,419 315,793 324,997 334,476 340,985 Long-term debt borrowings & capital lease obligations 1,175,349 1,082,101 1,050,097 953,767 974,991 996,758 1,026,684 1,048,058 1,070,499 1,092,164 1,112,811 1,134,078 1,152,157 Other long-term liabilities 54,940 56,671 57,458 51,431 50,281 51,400 52,548 54,125 55,252 56,435 57,577 58,666 59,787 Total liabilities 1,481,134 1,392,743 1,326,945 1,251,464 1,290,992 1,326,426 1,889,289 1,923,203 1,431,170 1,464,392 1,495,385 1,527,220 1,552,929 Stockholder's EquityCommon stock and additional paid-in capital 422,360 435,597 443,805 441,633 441,910 442,186 442,462 442,739 443,015 443,291 443,311 443,311 443,311 Treasury stock (6,571) (8,341) (111,516) (211,574) (211,574) (211,574) (211,574) (211,574) (211,574) (211,574) (211,574) (211,574) (211,574) Excess purchase price over predecessor basis (202,116) (202,116) (202,116) (202,116) (202,116) (202,116) (202,116) (202,116) (202,116) (202,116) (202,116) (202,116) (202,116) Retained earnings (accumulated deficit) 105,813 280,426 358,173 513,555 680,375 858,089 1,035,163 1,221,130 1,437,229 1,662,626 1,896,230 2,138,242 2,385,981 Accumulated other comprehensive income (loss) (2,415) (15,767) (22,475) (22,475) (22,475) (22,475) (22,475) (22,475) (22,475) (22,475) (22,475) (22,475) (22,475) Total stockholders' equity (deficit) 317,071 489,799 465,871 519,023 686,119 864,110 1,041,460 1,227,704 1,444,079 1,669,752 1,903,375 2,145,387 2,393,126 Total liabilities & Stockholders' Equity 1,798,205 1,882,542 1,792,816 1,770,487 1,977,112 2,190,536 2,930,750 3,150,907 2,875,250 3,134,145 3,398,760 3,672,607 3,946,056

Generac Holdings Inc.Cash Flow StatementIn thousandsFiscal Years Ending Dec. 31 2007 2008 2009 2010 2011 2012 2013 2014 2015Operating ActivitiesNet income (loss) (9,714) (555,955) 43,055 56,913 324,643 93,223 174,539 174,613 77,747 Adjustment to reconcile net income to net cash provided by operating activities:

Depreciation 6,181 7,168 7,715 7,632 8,103 8,293 10,955 13,706 16,742 Amortization of intangible assets 47,602 47,602 51,960 51,808 48,020 45,867 25,819 21,024 23,591 Amortization of original issue discount - - - - - 1,598 2,074 3,599 3,050 Amortization of deferred finance costs 4,225 3,905 3,417 2,439 1,986 2,161 2,698 3,016 2,379 Amortization of unrealized loss on interest rate swaps - - 24,222 - - 2,082 2,381 - -Tradenames & goodwill impairment - 583,486 - - 9,389 - - - 40,687 Loss (gain) on extinguishment of debt (18,759) (65,385) (14,745) 4,809 377 14,308 15,336 2,084 4,795 Loss (gain) on change in contracrual interest rate - - - - - - - (16,014) 2,381 Loss (gain) on remeasurement of contingent consideration - - - - - - - (4,877) -Provision for losses on accounts receivable 82 212 227 (124) (7) 204 1,037 672 481 Provision for losses on notes receivable 850 115 - - - - - - -Deferred income taxes - - - - (238,170) 62,429 82,675 37,878 26,955 Loss on disposal of property & equipment 60 234 41 56 10 261 370 576 59 Share-based compensation expense 357 40 38 6,363 8,646 10,780 12,368 12,612 8,241 Net changes in operating assets and liabilities:

Accounts receivable 4,808 (20,768) 11,779 (8,621) (22,235) (137) (5,257) (2,988) 9,610 Inventories 21,372 (26,366) 280 (3,151) (11,224) (31,656) (52,488) 3,508 9,084 Other assets (1,794) (617) (1,739) 1,177 (6,834) (8,416) (10,902) 2,456 5,063 Accounts payable (3,369) 34,449 (20,886) 7,896 18,517 (3,898) (5,847) 15,269 (27,771) Accrued wages & employee benefits 776 (806) 1,280 (197) 6,516 3,168 6,248 (9,405) (5,361) Other accrued liabilities (14,164) 2,911 (32,037) (12,519) 21,975 35,327 9,491 6,229 445 Excess tax benefits from equity awards - - - - - - (11,553) (10,972) (9,559)

Net cash flows from operating activities 38,513 10,225 74,607 114,481 169,712 235,594 259,944 252,986 188,619 Investing activities:Proceeds from sale of property & equipment 56 92 69 76 14 91 80 394 105 Expenditures for property & equipment (13,191) (5,186) (4,525) (9,631) (12,060) (22,392) (30,770) (34,689) (30,651) Collections on receivable notes 403 56 105 - - - - - -Proceeds from sale of business, net - - - - - - 2,254 - -Acquisition of business, net of cash acquired - - - (1,649) (83,907) (47,044) (116,113) (61,196) (73,782) Net cash flows from investing activities (12,732) (5,038) (4,351) (11,204) (95,953) (69,345) (144,549) (95,491) (104,328) Financing activities:Proceeds from short-term borrowings - - - - - 23,018 16,007 6,550 26,384 Proceeds from long-term borrowings - - - - - 1,455,614 1,200,000 - 100,000 Repayments of short-term borrowings - - - - - (23,000) (18,982) (26,444) (23,149) Repayments of long-term borrowings & capital lease obligations (9,500) (10,396) (9,500) (434,310) (59,355) (1,175,124) (901,184) (94,035) (150,826) Stock repurchases - - - - - - - - (99,942) Payment of debt issuance costs - - - - - (25,691) (22,376) (4) (2,117) Cash dividends paid - - - - - (404,332) (343,429) (902) (1,436) Taxes paid related to the net share settlement of equity awards - - - - (371) (6,425) (15,020) (12,181) (12,956) Excess tax benefits from equity awards - - - - 200 4,588 11,553 10,972 9,559 Proceeds from issuance of common stock - - - 248,309 - - - - -Proceeds from exercise of stock options - - - - 310 - 32 21 -Net cash flows from financing activities (8,937) 4,728 9,822 (186,001) (59,216) (151,352) (73,399) (116,023) (154,483)

Generac Holdings Inc.Cash Flow StatementIn thousandsFiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E (CV)Operating ActivitiesNet income (loss) 155,382 166,820 177,714 177,074 185,967 216,099 225,397 233,604 242,012 247,739 Adjustment to reconcile net income to net cash provided by operating activities:

Depreciation 18,075 19,513 21,067 22,744 24,554 26,508 28,619 30,897 33,356 36,011 Amortization of intangible assets 25,691 26,171 25,407 24,649 25,515 24,752 24,053 23,411 22,823 22,284 Loss (gain) on extinguishment of debt 5,223 5,223 5,223 5,223 5,223 5,223 5,223 5,223 5,223 5,223 Deferred income taxes 17,189 7,295 3,096 1,314 558 237 100 43 18 8 Net changes in operating assets and liabilities:

Accounts receivable 18,156 (9,842) (8,694) (7,303) (7,595) (7,898) (7,188) (6,376) (6,568) (4,510) Inventories 25,186 (18,011) (15,910) (13,364) (13,899) (14,455) (13,154) (11,669) (12,020) (8,253) Prepaid Expenses & Other Assets 68 (512) (452) (380) (395) (411) (374) (332) (342) (235) Other assets 293 (40) (36) (30) (31) (32) (29) (26) (27) (18) Accounts payable 1,451 6,587 5,818 4,888 5,083 5,286 4,811 4,268 4,396 3,018 Accrued wages & employee benefits 5,551 1,119 989 830 864 898 817 725 747 513 Other accrued liabilities 25,771 6,499 5,741 4,822 5,015 5,215 4,746 4,210 4,337 2,978

Net cash flows from operating activities 298,035 210,822 219,963 220,466 230,859 261,423 273,020 283,977 293,955 304,758 Investing activities:Expenditures for property & equipment (25,000) (25,000) (25,000) (25,000) (25,000) (25,000) (25,000) (25,000) (25,000) (25,000) Capitalization of Intangible assets 4,804 (7,639) (7,589) 8,667 (7,631) (6,996) (6,414) (5,880) (5,391) (4,942) Net cash flows from investing activities (20,196) (32,639) (32,589) (16,333) (32,631) (31,996) (31,414) (30,880) (30,391) (29,942) Financing activities:Changes in current portion of long term debt (157) 5,250 - 521,250 - (527,000) - - - - Repayments of long-term borrowings & capital lease obligations (57,928) (33,640) (34,529) (67,960) (38,039) (40,502) (43,076) (45,782) (48,630) (51,644) Proceeds from issuance (payment) of long term debt (96,330) 21,223 21,767 29,926 21,374 22,441 21,665 20,647 21,267 18,079 Stock repurchases (100,058) - - - - - - - - - Change in other long term liabilities (6,027) (1,150) 1,119 1,148 1,578 1,127 1,183 1,142 1,088 1,121 Proceeds from issuance of common stock (2,172) 276 276 276 276 276 276 19 - - Net cash flows from financing activities (262,671) (8,040) (11,366) 484,640 (14,811) (543,658) (19,952) (23,973) (26,274) (32,444)

Net increase (decrease) in cash & cash equivalents 15,168 170,143 176,008 688,773 183,417 (314,232) 221,655 229,123 237,291 242,372 Cash & cash equivalents at beginning of year 115,857 131,025 301,167 477,175 1,165,948 1,349,365 1,035,133 1,256,788 1,485,912 1,723,202 Cash & cash equivalents at end of year 131,025 301,167 477,175 1,165,948 1,349,365 1,035,133 1,256,788 1,485,912 1,723,202 1,965,574

Generac Holdings Inc.Common Size Income Statement

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E (CV)Net sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Depreciation (included in original COGS) 0.74% 0.94% 1.27% 1.26% 1.28% 1.32% 1.37% 1.42% 1.47% 1.54% 1.61% 1.69% 1.79%

Adj. Cost of goods sold (less depreciation) 63.73% 63.73% 63.81% 61.00% 61.00% 61.00% 61.00% 61.00% 61.00% 61.00% 61.00% 61.00% 61.00%

Adj. Gross Profit 39.07% 36.27% 36.19% 39.00% 39.00% 39.00% 39.00% 39.00% 39.00% 39.00% 39.00% 39.00% 39.00%

Selling & service expense 7.24% 8.24% 9.89% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00% 9.00%

Research & development expense 1.97% 2.16% 2.50% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%

General & administrative expense 3.73% 3.75% 4.02% 4.00% 4.00% 4.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00% 3.00%

Amortization of intangibles 1.74% 1.44% 1.79% 1.79% 1.72% 1.59% 1.48% 1.48% 1.38% 1.29% 1.22% 1.16% 1.11%

Tradenames & goodwill impairment 0.00% 0.00% 3.09% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total operating expenses 14.68% 15.25% 21.29% 16.79% 16.72% 16.59% 15.48% 15.48% 15.38% 15.29% 15.22% 15.16% 15.11%

Income (loss) from operations 23.66% 20.08% 13.63% 22.21% 22.28% 22.41% 23.52% 23.52% 23.62% 23.71% 23.78% 23.84% 23.89%

Interest expense 3.66% 3.23% 3.25% 4.11% 3.98% 3.88% 5.76% 5.62% 3.68% 3.63% 3.59% 3.55% 3.53%

Investment income 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01%

Gain (loss) on extinguishment of debt -1.03% -0.14% -0.36% -0.36% -0.34% -0.33% -0.31% -0.30% -0.29% -0.28% -0.27% -0.26% -0.26%

Gain (loss) on change in contractual interest rate 0.00% 1.10% -0.18% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Other expense, net 0.13% 0.10% 0.42% 0.16% 0.15% 0.15% 0.14% 0.13% 0.13% 0.13% 0.12% 0.12% 0.12%

Total other income (expense), net -4.90% -2.40% -4.30% -4.62% -4.47% -4.34% -6.20% -6.04% -4.09% -4.02% -3.97% -3.92% -3.90%

Income (loss) before provision (benefit) for income taxes 18.76% 17.68% 9.34% 17.59% 17.81% 18.07% 17.32% 17.49% 19.54% 19.69% 19.81% 19.93% 20.00%

Provision (benefit) for income taxes 7.01% 5.73% 3.43% 6.77% 6.86% 6.96% 6.67% 6.73% 7.52% 7.58% 7.63% 7.67% 7.70%

Net income (loss) 11.75% 11.95% 5.90% 10.82% 10.96% 11.11% 10.65% 10.75% 12.02% 12.11% 12.18% 12.25% 12.30%

Generac Holdings Inc.Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E (CV)AssetsCash & cash equivalents 10.11% 12.99% 8.80% 9.12% 19.78% 29.84% 70.12% 78.03% 57.55% 67.52% 77.50% 87.26% 97.58%

Accounts receivable, net 11.10% 12.94% 13.83% 11.42% 11.42% 11.42% 11.42% 11.42% 11.42% 11.42% 11.42% 11.42% 11.42%

Inventories 20.21% 21.86% 24.70% 20.90% 20.90% 20.90% 20.90% 20.90% 20.90% 20.90% 20.90% 20.90% 20.90%

Prepaid expenses & other assets 0.36% 0.64% 0.65% 0.59% 0.59% 0.59% 0.59% 0.59% 0.59% 0.59% 0.59% 0.59% 0.59%

Total current assets 44.03% 50.00% 50.21% 42.03% 52.69% 62.75% 103.03% 110.94% 90.46% 100.42% 110.41% 120.17% 130.49%

Property & equipment, net 9.85% 11.56% 13.98% 14.48% 15.17% 15.89% 16.66% 17.35% 17.96% 18.59% 19.25% 19.85% 20.61%

Customer lists, net 2.88% 2.81% 2.98% 3.47% 3.01% 2.64% 3.27% 2.89% 2.56% 2.27% 2.03% 1.81% 1.63%

Patents, net 4.20% 3.89% 4.08% 3.42% 2.95% 2.56% 2.25% 1.98% 1.74% 1.53% 1.36% 1.20% 1.08%

Other intangible assets, net 0.30% 0.29% 0.21% 0.19% 0.18% 0.17% 0.17% 0.16% 0.15% 0.15% 0.14% 0.14% 0.14%

Trade names 11.66% 12.50% 12.23% 11.13% 10.55% 10.04% 9.66% 9.29% 8.93% 8.63% 8.38% 8.13% 7.97%

Goodwill 40.94% 43.50% 50.84% 46.62% 43.98% 41.89% 40.28% 38.73% 37.24% 35.98% 34.93% 33.91% 33.25%

Deferred financing costs, net 1.35% 1.11% 0.98% 0.97% 0.92% 0.87% 0.84% 0.81% 0.78% 0.75% 0.73% 0.71% 0.69%

Deferred income taxes 5.73% 3.18% 0.51% 0.88% 0.35% 0.14% 0.06% 0.02% 0.01% 0.00% 0.00% 0.00% 0.00%

Other assets 0.09% 0.00% 0.07% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05% 0.05%Total assets 121.03% 128.86% 136.10% 123.24% 129.84% 137.00% 176.25% 182.20% 159.87% 168.37% 177.27% 185.97% 195.90%

LiabilitiesCurrent Liabilities:Short-term borrowings 0.64% 0.37% 0.65% 0.63% 0.59% 0.56% 0.54% 0.52% 0.50% 0.48% 0.47% 0.46% 0.45%

Accounts payable 7.35% 9.05% 8.22% 7.64% 7.64% 7.64% 7.64% 7.64% 7.64% 7.64% 7.64% 7.64% 7.64%

Accrued wages & employee benefits 1.79% 1.20% 0.99% 1.30% 1.30% 1.30% 1.30% 1.30% 1.30% 1.30% 1.30% 1.30% 1.30%

Other accrued liabilities 6.26% 5.81% 6.27% 7.54% 7.54% 7.54% 7.54% 7.54% 7.54% 7.54% 7.54% 7.54% 7.54%

Current portion of long-term debt & capital lease obligations 0.84% 0.04% 0.05% 0.03% 0.38% 0.36% 31.69% 30.47% 0.00% 0.00% 0.00% 0.00% 0.00%

Total current liabilities 16.88% 16.46% 16.19% 17.14% 17.45% 17.40% 48.72% 47.48% 16.98% 16.96% 16.95% 16.94% 16.93%

Long-term debt borrowings & capital lease obligations 79.11% 74.07% 79.72% 66.39% 64.03% 62.34% 61.74% 60.60% 59.52% 58.67% 58.04% 57.43% 57.20%

Other long-term liabilities 3.70% 3.88% 4.36% 3.58% 3.30% 3.21% 3.16% 3.13% 3.07% 3.03% 3.00% 2.97% 2.97%Total liabilities 99.69% 95.33% 100.73% 87.12% 84.78% 82.96% 113.62% 111.21% 79.57% 78.67% 77.99% 77.33% 77.09%

Stockholder's EquityCommon stock and additional paid-in capital 28.43% 29.82% 33.69% 30.74% 29.02% 27.66% 26.61% 25.60% 24.63% 23.81% 23.12% 22.45% 22.01%Treasury stock 0.44% 0.57% 8.47% -14.73% -13.89% -13.23% -12.72% -12.23% -11.76% -11.37% -11.03% -10.71% -10.50%

Excess purchase price over predecessor basis -13.60% -13.83% -15.34% -14.07% -13.27% -12.64% -12.15% -11.69% -11.24% -10.86% -10.54% -10.23% -10.03%

Retained earnings (accumulated deficit) 7.12% 19.20% 27.19% 35.75% 44.68% 53.67% 62.25% 70.61% 79.91% 89.32% 98.90% 108.27% 118.45%

Accumulated other comprehensive income (loss) -0.16% -1.08% -1.71% -1.56% -1.48% -1.41% -1.35% -1.30% -1.25% -1.21% -1.17% -1.14% -1.12%Total stockholders' equity (deficit) 21.34% 33.53% 35.37% 36.13% 45.06% 54.04% 62.63% 70.99% 80.29% 89.70% 99.27% 108.64% 118.80%

Generac Holdings Inc.Value Driver EstimationIn thousandsFiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E (CV)EBITA CalculationsNet sales 1,485,765 1,460,919 1,317,299 1,436,559 1,522,753 1,598,890 1,662,846 1,729,360 1,798,534 1,861,483 1,917,327 1,974,847 2,014,344 Less:

Adj. Cost of goods sold 905,250 930,994 840,607 876,301 928,879 975,323 1,014,336 1,054,909 1,097,106 1,135,505 1,169,570 1,204,657 1,228,750 Depreciation 10,955 13,706 16,742 18,075 19,513 21,067 22,744 24,554 26,508 28,619 30,897 33,356 36,011 Selling & service expense 107,515 120,408 130,242 129,290 137,048 143,900 149,656 155,642 161,868 167,533 172,559 177,736 181,291 General & administrative expense 55,490 54,795 52,947 57,462 60,910 63,956 49,885 51,881 53,956 55,844 57,520 59,245 60,430 Amortization of intangibles 25,819 21,024 23,591 25,691 26,171 25,407 24,649 25,515 24,752 24,053 23,411 22,823 22,284 Research & development expense 29,271 31,494 32,922 28,731 30,455 31,978 33,257 34,587 35,971 37,230 38,347 39,497 40,287 Implied interest on PV of operating leases 336 382 937 986 1,037 1,092 1,149 1,209 1,273 1,340 1,410 1,484 1,561

EBITA 351,801 288,880 221,185 301,994 320,813 338,351 369,468 383,480 399,646 414,039 426,434 439,016 446,852

Adjusted TaxesProvision (benefit) for income taxes 104,177 83,749 45,236 97,271 104,432 111,252 110,851 116,418 135,282 141,102 146,240 151,503 155,089 Tax shield on interest expense 20,957 18,178 16,495 22,734 23,359 23,873 36,881 37,385 25,477 25,988 26,476 26,978 27,404 Tax on Interest/Investment Income 35 50 47 67 73 77 81 85 88 91 95 97 100 Tax shield on amortized goodwill - - 15,664 - - - - - - - - - - Tax shield on implied interest on PV of operating leases 129 147 361 379.53 399 420 442 466 490 516 543 571 601 Tax on non-operating income (losses):

Gain (loss) on extinguishment of debt (5,904) (802) (1,846) (2,011) (2,011) (2,011) (2,011) (2,011) (2,011) (2,011) (2,011) (2,011) (2,011)Gain (loss) on change in contractual interest rate - 6,165 (917) - - - - - - - - - - Costs related to acquisition 418 152 460 - - - - - - - - - - Other expense, net 763 563 2,112 898 898 898 898 898 898 898 898 898 898

Total Adjusted Taxes 131,478 97,071 82,124 123,227 131,026 138,376 151,002 157,093 164,069 170,423 176,072 181,863 185,902

Change in Deferred TaxesDeferred Tax Liability - 13,449 6,166 Deferred Tax Asset 26,869 22,841 29,355 12,673 5,378 2,282 969 411 174 74 31 13 6 Change in Deferred Taxes 21,818 17,477 (13,797) 10,516 7,295 3,096 1,314 558 237 100 43 18 8

NOPLAT 242,140 209,286 125,264 189,284 197,082 203,071 219,781 226,944 235,813 243,716 250,404 257,171 260,957

Invested Capital

Operating Current AssetsNormal Cash 29,715 29,218 26,346 28,731 30,455 31,978 33,257 34,587 35,971 37,230 38,347 39,497 40,287 Accounts Receivable 164,907 189,107 182,185 164,029 173,871 182,564 189,867 197,462 205,360 212,548 218,924 225,492 230,002 Inventories 300,253 319,385 325,375 300,189 318,201 334,111 347,475 361,374 375,829 388,983 400,653 412,672 420,926 Prepaid Expenses 5,358 9,384 8,600 8,532 9,044 9,496 9,876 10,271 10,681 11,055 11,387 11,729 11,963 TOTAL 500,233 547,094 542,506 501,481 531,570 558,149 580,475 603,694 627,841 649,816 669,310 689,390 703,177

Operating Current LiabilitiesAccounts Payable 109,238 132,248 108,332 109,783 116,370 122,188 127,076 132,159 137,445 142,255 146,523 150,919 153,937 Accrued Expenses 119,561 102,358 95,641 126,964 134,581 141,310 146,963 152,841 158,955 164,518 169,454 174,538 178,028

TOTAL 228,799 234,606 203,973 236,746 250,951 263,498 274,038 285,000 296,400 306,774 315,977 325,456 331,966

Net PPE 146,390 168,821 184,213 207,969 230,979 253,989 276,999 300,009 323,019 346,029 369,039 392,049 415,059

Other Long-Term Operating AssetsCustomer lists, net 42,764 41,002 39,313 49,883 45,858 42,157 54,375 49,987 45,953 42,245 38,836 35,702 32,821 Patents, net 62,418 56,894 53,772 49,111 44,854 40,965 37,414 34,171 31,209 28,504 26,033 23,776 21,715 Other intangible assets,net 4,447 4,298 2,768 2,768 2,768 2,768 2,768 2,768 2,768 2,768 2,768 2,768 2,768 Trade names 173,196 182,684 161,057 159,952 160,596 160,596 160,596 160,596 160,596 160,596 160,596 160,596 160,596 PV of operating leases 5,473 6,237 15,280 16,082 16,925 17,812 18,746 19,729 20,763 21,852 22,997 24,203 25,472 Other Assets 1,369 48 964 671 712 747 777 808 841 870 896 923 941

TOTAL 289,667 291,163 273,154 278,467 271,711 265,045 274,676 268,059 262,130 256,834 252,126 247,968 244,313

Other Long-Term Operating LiabilitiesWarranty liabilities*Deferred Revenue*Other liabilities 54,940 56,671 57,458 51,431 50,281 51,400 52,548 54,125 55,252 56,435 57,577 58,666 59,787 TOTAL 54,940 56,671 57,458 51,431 50,281 51,400 52,548 54,125 55,252 56,435 57,577 58,666 59,787 *Captured in Accrued Expenses account

Invested Capital 652,552 715,801 738,442 699,740 733,028 762,285 805,564 832,636 861,338 889,470 916,921 945,284 970,797

NOPLAT 242,140 209,286 125,264 189,284 197,082 203,071 219,781 226,944 235,813 243,716 250,404 257,171 260,957 Beginning Invested Capital 522,158 652,552 715,801 738,442 699,740 733,028 762,285 805,564 832,636 861,338 889,470 916,921 945,284 ROIC 46.37% 32.07% 17.50% 25.63% 28.17% 27.70% 28.83% 28.17% 28.32% 28.30% 28.15% 28.05% 27.61%

NOPLAT 242,140 209,286 125,264 189,284 197,082 203,071 219,781 226,944 235,813 243,716 250,404 257,171 260,957 CapEx 130,393 63,250 22,641 (38,703) 33,289 29,256 43,279 27,072 28,702 28,132 27,451 28,363 25,513 FCF 111,747 146,036 102,623 227,987 163,794 173,815 176,501 199,872 207,111 215,585 222,953 228,808 235,445

Invested Capital 522,158 652,552 715,801 738,442 699,740 733,028 762,285 805,564 832,636 861,338 889,470 916,921 945,284 ROIC - WACC 38.07% 23.77% 9.20% 17.33% 19.87% 19.40% 20.53% 19.87% 20.02% 20.00% 19.85% 19.75% 19.31%EP 248,455 170,170 67,946 128,004 139,014 142,240 156,521 160,094 166,716 172,237 176,591 181,079 182,512

Generac Holdings Inc.Weighted Average Cost of Capital (WACC) Estimation

Cost of Equity (Re)Risk-free rate 2.63%Equity Risk Premium 4.89%Beta 1.51Cost of Equity (Re) 10.01%

Cost of Debt (Rd)LIBOR 3.50%

Plus: 30-Year Treasury Yield

2.63%

Pre-Tax Cost of Debt 6.13%

Marginal Tax Rate 38.50%After-tax Cost of Debt 3.77%

Total Equity 2,843,844$ Number of Shares Outstanding 69,583 Share Price $40.87

Total Debt 1,074,628$ BV of Debt 1,059,348$ PV Operating Leases 15,280$

Total Value 3,918,472$ Weight of Equity 72.58%

Cost of equity 10.01%Weight of Debt 27.42%

After-tax Cost of Debt 3.77%

WACC 8.30%

Generac Holdings Inc.Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs: CV Growth 2.00% CV ROIC 27.47% WACC 8.30% Cost of Equity 10.01%

Fiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E (CV)

DCF ModelNOPLAT 189,284 197,082 203,071 219,781 226,944 235,813 243,716 250,404 257,171 260,957 ROIC 25.63% 28.17% 27.70% 28.83% 28.17% 28.32% 28.30% 28.15% 28.05% 27.47%CapEx (Change in IC) (38,703) 33,289 29,256 43,279 27,072 28,702 28,132 27,451 28,363 25,513 Free Cash Flow 227987 163794 173815 176501 199872 207111 215585 222953 228808 235445Continuing Value 3,841,449

CF to Discount 227987 163794 173815 176501 199872 207111 215585 222953 228808 3841449Periods to Discount 1 2 3 4 5 6 7 8 9 9PV of Free Cash Flows 210517 139653 136842 128309 134164 128371 123384 117823 111651 1874515

PV of Operating Assets 3,105,229$ Excess Cash 102,293$ Short-term borrowings (8,594)$ Current portion of long-term debt & capital lease obligations (657)$ Long-term debt borrowings & capital lease obligations (1,050,097)$ PV of Operating Leases (15,280)$ PV of ESOP (63,299)$ Value of Equity 2,069,595$ Shares Outstanding 69,583 Intrinsic Stock Price 29.74$ Fraction Year Elapsed 0.874Intrinsic Stock Price as of 11/14/2016 32.33$

EP ModelEconomic Profit 128004 139014 142240 156521 160094 166716 172237 176591 181079 182512Continuing Value 2,896,165 Periods to Discount 1 2 3 4 5 6 7 8 9 9CF to Discount 128004 139014 142240 156521 160094 166716 172237 176591 181079 2896165PV of Cash Flows 118195 118525 111983 113784 107463 103333 98575 93322 88361 1413244

PV of Economic Profit 2366787Plus: Beginning IC 738442PV of Operating Assets 3,105,229$ Excess Cash 102,293$ Short-term borrowings (8,594)$ Current portion of long-term debt & capital lease obligations (657)$ Long-term debt borrowings & capital lease obligations (1,050,097)$ PV of Operating Leases (15,280)$ PV of ESOP (63,299)$ Value of Equity 2,069,595$ Shares Outstanding 69,583 Intrinsic Stock Price 29.74$ Fraction Year Elapsed 0.874Intrinsic Stock Price as of 11/14/2016 32.33$

Generac Holdings Inc.Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E (CV)

EPS 2.28$ 2.45$ 2.60$ 2.59$ 2.72$ 3.16$ 3.30$ 3.42$ 3.54$ 3.62$

Key Assumptions CV growth 2.00% CV ROE 10.35% Cost of Equity 10.01%

Future Cash Flows P/E Multiple (CV Year) 10.07 EPS (CV Year) 3.62$ Future Stock Price 36.49$ Imputed Dividends Per Share 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 Future Cash Flows 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 36.49$

Periods to Discount 1 2 3 4 5 6 7 8 9 9 Discounted Cash Flows 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 15.46

Intrinsic Value 15.46$ Fraction of Year Elapsed 0.87$ Intrinsic Stock Price as of 11/14/2016 16.81$

Generac Holdings Inc.Relative Valuation Models

EPS EPS EV/EBIT EV/EBITTicker Company Price 2016E 2017E P/E 16 P/E 17 EBIT 2016E 2017EBGG Briggs & Stratton $18.01 $1.36 $1.59 13.24 11.33 50.44 17.94 8.68 CMI Cummins Inc. $126.62 $8.16 $7.96 15.52 15.91 1,573.00 14.16 11.25 TEX Terex Corporation $23.81 $0.95 $1.24 25.06 19.20 226.50 18.10 19.37 CAT Caterpillar Inc. $83.88 $3.31 $3.34 25.34 25.11 2,513.00 32.09 28.09 HMC Honda Motor Co Ltd $30.70 $2.67 $2.82 11.50 10.89 6,414.15 15.89 19.90

Average 18.13 16.49 19.64 17.46

GNRC Generac Holdings Inc. $40.87 2.28 2.45 17.9 16.7 162.83 22.18 18.36

Implied Value: Relative P/E (EPS16) $ 41.35 Relative P/E (EPS17) 40.34$

EV/EBIT (2016E) 32.45$ EV/EBIT (2017E) 27.36$

Generac Holdings Inc.Key Management Ratios

Fiscal Years Ending Dec. 31 2013 2014 2015 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E (CV)

Liquidity RatiosCurrent Ratio CA / CL 2.608 3.037 3.102 2.452 3.019 3.606 2.115 2.337 5.327 5.920 6.514 7.095 7.708 Quick Ratio (CA - Inventory) / CL 1.411 1.709 1.576 1.233 1.822 2.405 1.686 1.897 4.097 4.688 5.281 5.861 6.474 Cash Asset Ratio (Cash + Marketable Securities) / CL 0.599 0.789 0.543 0.532 1.133 1.715 1.439 1.644 3.389 3.980 4.572 5.152 5.764

Activity or Asset-Management RatiosTotal Asset Turnover Sales / Avg. Total Assets 0.873 0.794 0.717 0.806 0.813 0.767 0.649 0.569 0.597 0.620 0.587 0.559 0.529 Receivables Turnover Sales / Avg. AR 9.909 8.253 7.096 8.299 9.013 8.972 8.930 8.930 8.930 8.909 8.887 8.887 8.845 Inventory Turnover COGS / Inventory 3.015 2.915 2.584 2.919 2.919 2.919 2.919 2.919 2.919 2.919 2.919 2.919 2.919

Financial Leverage RatiosDebt to Equity Ratio Total Debt / Shareholder's Equity 3.950 2.337 2.397 1.955 1.516 1.230 1.551 1.334 0.786 0.693 0.620 0.560 0.510 Debt Ratio Total Liabilities / Total Assets 0.824 0.740 0.740 0.707 0.653 0.606 0.645 0.610 0.498 0.467 0.440 0.416 0.394 Interest Coverage Ratio Operating Income / Interest Expense 6.457 6.214 4.191 5.404 5.592 5.779 4.082 4.190 6.421 6.538 6.630 6.720 6.762

Profitability RatiosReturn on Equity Net Income / Beg. Shareholder's Equity 37.65% 55.07% 15.87% 33.35% 32.14% 25.90% 20.49% 17.86% 17.60% 15.61% 13.99% 12.71% 11.55%Return on Assets Net income / Beg. Total Assets 10.88% 9.71% 4.13% 8.67% 9.42% 8.99% 8.08% 6.35% 6.86% 7.84% 7.45% 7.12% 6.75%Profit margin Net Income / Net Sales 11.75% 11.95% 5.90% 10.82% 10.96% 11.11% 10.65% 10.75% 12.02% 12.11% 12.18% 12.25% 12.30%

Payout Policy RatiosNo recurring dividends

Sensitivity Analysis

Beta WACC32.33$ 1.3 1.4 1.45 1.51 1.6 1.75 1.85 32.33$ 7.00% 7.50% 8.00% 8.30% 8.50% 9.00% 9.50%1.25% 35.43 32.69 31.42 29.98 27.98 25.00 23.22 7.50% 50.00 43.88 38.78 36.11 34.47 30.78 27.591.50% 36.43 33.54 32.21 30.71 28.62 25.51 23.67 8.00% 48.42 42.44 37.45 34.85 33.24 29.64 26.521.75% 37.51 34.47 33.07 31.49 29.30 26.07 24.15 8.50% 46.85 41.00 36.13 33.58 32.02 28.49 25.44

CV Growth of NOPLAT 2.00% 38.70 35.47 33.99 32.33 30.03 26.66 24.66 Selling & Service as a % of Sales 9.00% 45.27 39.56 34.81 32.32 30.79 27.35 24.372.25% 39.99 36.56 35.00 33.24 30.83 27.29 25.21 9.50% 43.70 38.12 33.48 31.06 29.56 26.20 23.302.50% 41.41 37.75 36.09 34.23 31.68 27.97 25.80 10.00% 42.12 36.69 32.16 29.79 28.33 25.06 22.232.75% 42.98 39.05 37.28 35.31 32.61 28.70 26.43 10.50% 40.55 35.25 30.84 28.53 27.11 23.92 21.15

ERP Pre-Tax Cost of Debt32.33$ 4.50% 4.65% 4.75% 4.89% 5.00% 5.25% 5.50% 32.33$ 4.50% 5.00% 5.50% 6.13% 6.50% 7.00% 7.50%

1.30 42.50 40.98 40.00 38.70 37.71 35.60 33.65 22.00% 31.86 31.83 31.80 31.76 31.74 31.70 31.671.40 39.10 37.64 36.71 35.47 34.53 32.52 30.66 24.00% 32.09 32.07 32.04 32.00 31.97 31.94 31.911.45 37.54 36.12 35.21 33.99 33.07 31.11 29.30 26.00% 32.30 32.27 32.24 32.20 32.18 32.15 32.11

Beta 1.51 35.79 34.40 33.52 32.33 31.44 29.53 27.76 CV Growth ROIC 27.47% 32.43 32.40 32.37 32.33 32.31 32.28 32.241.60 33.36 32.02 31.18 30.03 29.18 27.34 25.64 28.00% 32.47 32.44 32.41 32.37 32.35 32.32 32.291.75 29.78 28.53 27.73 26.66 25.85 24.12 22.53 29.00% 32.55 32.52 32.49 32.45 32.43 32.40 32.361.85 27.67 26.46 25.69 24.66 23.89 22.23 20.70 29.50% 32.59 32.56 32.53 32.49 32.47 32.43 32.40

COGS as a % of Sales WACC32.33$ 59.0% 59.5% 60.0% 61.0% 61.5% 62.0% 62.5% 32.33$ 7.00% 7.50% 8.00% 8.30% 8.50% 9.00% 9.50%37.0% 38.72 37.43 36.14 33.56 32.27 30.98 29.69 7.50% 49.99 43.86 38.77 36.10 34.46 30.77 27.5837.5% 38.28 37.00 35.72 33.15 31.87 30.59 29.31 8.00% 48.41 42.43 37.45 34.84 33.23 29.63 26.5138.0% 37.83 36.56 35.29 32.74 31.47 30.20 28.92 8.50% 46.84 40.99 36.12 33.57 32.01 28.49 25.44

Marginal Tax Rate 38.5% 37.39 36.12 34.86 32.33 31.07 29.80 28.54 Selling & Service as a % of Sales 9.00% 45.26 39.55 34.80 32.33 30.78 27.34 24.3639.0% 36.94 35.68 34.43 31.92 30.66 29.41 28.15 9.50% 43.69 38.11 33.48 31.05 29.55 26.20 23.2939.5% 36.49 35.24 34.00 31.50 30.26 29.01 27.76 10.00% 42.11 36.68 32.15 29.78 28.33 25.05 22.2240.0% 36.04 34.80 33.56 31.09 29.85 28.61 27.37 10.50% 40.54 35.24 30.83 28.52 27.10 23.91 21.15

Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012) Present Value of Operating Lease Obligations (2011) Present Value of Operating Lease Obligations (2010)

Operating Operating Operating Operating Operating OperatingFiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases #REF! Leases Fiscal Years Ending 28.6183071983984 Leases Fiscal Years Ending Leases Fiscal Years Ending Leases2016 3561 2015 2585 2014 1952 2013 825 2012 124 2011 1852017 3072 2016 2567 2015 1900 2014 540 2013 75 2012 1002018 3033 2017 1571 2016 1543 2015 269 2014 75 2013 1002019 2153 2018 264 2017 830 2016 108 2015 0 2014 02020 1809 2019 0.01 2018 3 2017 18 2016 0.01 2015 0.01Thereafter 5489 Thereafter 0 Thereafter 0 Thereafter 0 Thereafter 0 Thereafter 0.01Total Minimum Payments 19117 Total Minimum Payments 6987.01 Total Minimum Payments 6228 Total Minimum Payments 1760 Total Minimum Payments 274.01 Total Minimum Payments 385.02Less: Interest 3837 Less: Interest 750 Less: Interest 755 Less: Interest 180 Less: Interest 28 Less: Interest 38PV of Minimum Payments 15280 PV of Minimum Payments 6237 PV of Minimum Payments 5473 PV of Minimum Payments 1580 PV of Minimum Payments 246 PV of Minimum Payments 347

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre-Tax Cost of Debt 6.13% Pre-Tax Cost of Debt 6.13% Pre-Tax Cost of Debt 6.13% Pre-Tax Cost of Debt 6.13% Pre-Tax Cost of Debt 6.13% Pre-Tax Cost of Debt 6.13%Number Years Implied by Year 6 Payment 3.0 Number Years Implied by Year 6 Payment 1.0 Number Years Implied by Year 6 Payment 1.0 Number Years Implied by Year 6 Payment 1.0 Number Years Implied by Year 6 Payment 1.0 Number Years Implied by Year 6 Payment 1.0

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 3561 3355.3 1 2585 2435.7 1 1952 1839.3 1 825 777.3 1 124 116.8 1 185 174.32 3072 2727.4 2 2567 2279.0 2 1900 1686.9 2 540 479.4 2 75 66.6 2 100 88.83 3033 2537.2 3 1571 1314.2 3 1543 1290.8 3 269 225.0 3 75 62.7 3 100 83.74 2153 1697.0 4 264 208.1 4 830 654.2 4 108 85.1 4 0 0.0 4 0 0.05 1809 1343.5 5 0.01 0.0 5 3 2.2 5 18 13.4 5 0.01 0.0 5 0.01 0.06 & beyond 1809 3620.0 6 & beyond 0 0.0 6 & beyond 0 0.0 6 & beyond 0 0.0 6 & beyond 0 0.0 6 & beyond 0.01 0.0PV of Minimum Payments 15280.5 PV of Minimum Payments 6237.0 PV of Minimum Payments 5473.3 PV of Minimum Payments 1580.3 PV of Minimum Payments 246.2 PV of Minimum Payments 346.8

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares): 2,128,014Average Time to Maturity (years): 7.70Expected Annual Number of Options Exercised: 276,365

Current Average Strike Price: 15.15$ Cost of Equity: 10.01%Current Stock Price: $40.87

2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025EIncrease in Shares Outstanding: 276,365 276,365 276,365 276,365 276,365 276,365 276,365 19,346 0 0Average Strike Price: 15.15$ 15.15$ 15.15$ 15.15$ 15.15$ 15.15$ 15.15$ 15.15$ 15.15$ 15.15$ Increase in Common Stock Account: 4,186,937 4,186,937 4,186,937 4,186,937 4,186,937 4,186,937 4,186,937 293,086 - -

Change in Treasury Stock 100,058,000 0 0 0 0 0 0 0 0 0Expected Price of Repurchased Shares: 40.87$ 44.96$ 49.46$ 54.41$ 59.86$ 65.85$ 72.44$ 79.69$ 87.67$ 96.45$ Number of Shares Repurchased: 2,448,202 - - - - - - - - -

Shares Outstanding (beginning of the year) 443,805,000 441,633,164 441,909,529 442,185,895 442,462,260 442,738,626 443,014,991 443,291,357 443,310,702 443,310,702Plus: Shares Issued Through ESOP 276,365 276,365 276,365 276,365 276,365 276,365 276,365 19,346 0 0Less: Shares Repurchased in Treasury 2,448,202 - - - - - - - - - Shares Outstanding (end of the year) 441,633,164 441,909,529 442,185,895 442,462,260 442,738,626 443,014,991 443,291,357 443,310,702 443,310,702 443,310,702Formatted in thousands 441,633 441,910 442,186 442,462 442,739 443,015 443,291 443,311 443,311 443,311

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol GNRCCurrent Stock Price $40.87Risk Free Rate 2.63%Current Dividend Yield 0.00%Annualized St. Dev. of Stock Returns 36.76%

Average Average B-S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 2,128,014 15.15 7.70 29.75$ 63,298,866$ Total 2,128,014 15.15$ 7.70 29.75$ 63,298,866$

63,299$