HVAC Stocks Can Keep Beating the Market. Here’s Why.
The summer heat is nearing an end, but nothing is cooling down HVAC supplies.
The heating, ventilation and air conditioning business is quickly becoming one of the most consistent end markets in the industrial universe. It will also be a major ESG game and it will benefit from post-Covid back-to-work trends. Earnings and valuation multiples are increasing.
The four main players
Johnson Controls International
(JCI) – all reported strong second quarter earnings, up more than 40% this year on average.
On Wednesday, Trane reported $1.92 in earnings per share from $3.83 billion in sales. Wall Street was looking for $1.90 in earnings per share from $3.77 billion in sales. The company also raised its full-year sales forecast and its earnings per share went from $6 to $6.05.
Still, the stock, which was up 42% the year before Wednesday, fell 3% on the news. Investors wanted more, and rising costs held back guidance. Still, bookings grew 30% year over year, surpassing the 18% sales increase.
“We think the drop in profits for [Trane] offers an entry point for this secular growth stock,” wrote Credit Suisse analyst John Walsh following the report. He rates the stock buying and has a price target of $214. The stock closed at $197 on Friday.
In the case of HVAC, there are two new trends that can help beat the market.
First, commercial building operators try to improve air quality when people go back to work. That could mean upgrading systems to adjust things like airflow and humidity.
The other big trend is the E in ESG, short for environmental, social and governance factors. Dozens of companies set ambitious goals to reduce their ecological footprint. More efficient air conditioning systems with newer coolants are an easy way to reduce environmental impact.
RBC Analyst Deane DrayCarrier’s favorite part of the group is Carrier. He rates it as a buy, with a price target of $61. The stock closed Friday at $56.38. He rates Trane and Johnson Hold and does not cover Lennox.
Dray is not alone in his respect for Carrier. That stock, along with Johnson Controls, is Wall Street’s favorites, with two-thirds of analysts rating both of their stocks Buy. The average Buy-rating ratio for equities in the
is around 55%. Only 36% of analysts reviewing Trane rate buying, and none have a buy on Lennox.
Valuation is an important point of attention. The four trade for an average of about 24 times estimated profits for 2022, up 17 times in recent years. The S&P 500 is trading at about 20 times its estimated 2022 earnings.
The HVAC stock is trading at a premium to the market, but earnings growth is accelerating for all of them except Lennox. Trane, Johnson and Carrier are expected to grow at an average rate of about 14% per year over the next two years, better than the roughly 10% expected for the S&P. In addition, earnings expectations may turn out to be conservative as secular trends gain momentum.
HVAC supplies are no longer dependent on warm weather. Other key trends are heating up.
Write to Al Root at firstname.lastname@example.org