The Zacks Building Products - Air Conditioner & Heating industry has been benefiting from maintaining, monitoring and repairing services along with prudent cost-management practices. Also, the replacement of older systems to reduce electricity consumption and carbon footprint, as well as planned investments in technologies to capture more growth, is acting as a major tailwind for the industry participants like Comfort Systems USA, Inc. (FIX Quick QuoteFIX - Free Report) and AAON, Inc. (AAON Quick QuoteAAON - Free Report) . However, supply-chain disruptions and inflationary pressures are major challenges.

Industry Description

The Zacks Building Products - Air Conditioner & Heating industry comprises designers, manufacturers, and marketers of a broad range of products for heating, ventilation, air conditioning, and refrigeration markets. The products include rooftop units, chillers, air-handling units, condensing units and coils. The industry players also supply thermostats, insulation materials, refrigerants, grills, registers, sheet metal, tools, concrete pads, tape and adhesives. Air conditioning and heating equipment are sold in residential replacement, commercial and industrial HVAC (heating, ventilation and air conditioning) as well as residential new construction markets.

3 Trends Shaping the Future of the Air Conditioner & Heating Industry

U.S. Administration’s Pro-Environmental Moves: Reducing greenhouse gas emissions for a cleaner environmental footprint has been a major focus of the U.S. administration. Many industry participants remain engaged in supporting industries and facilities by selling and maintaining clean and efficient energy systems to reach their environmental goals for carbon reduction, while providing resiliency to grid outages. The companies are also gaining from the fast-growing controlled environment agriculture industry, courtesy of their consistent supply of clean cooling solutions. Overall, the companies are well positioned to gain from the renewable energy drive of the pro-environmental U.S. administration. Meanwhile, the companies have also been benefiting from an improvement in the non-residential market along with a rise in repair and remodeling activities.

Technology Augmentation & Inorganic Moves: Persistent investments in technologies designed to revolutionize customer experience seem vital for the industry. Digitization of the companies’ marketplace via e-commerce and iOS/Android-enabled apps, supported by a comprehensive database of product information, continues to see strong momentum. Importantly, new investments in the expansion of distribution, research and development projects, and marketing programs are contributing significantly to the companies’ top lines. The players are also actively pursuing accretive acquisitions to broaden their product portfolio and expand their geographic footprint as well as market share. Meanwhile, services associated with maintaining, monitoring and repairing the existing equipment are also providing the industry participants with stable revenue sources. The industry generates a major share of revenues from these services, which consumers generally cannot suspend even when the construction market fluctuates.

Supply-Chain Woes, Rising Costs, Regulations: Supply-chain disruptions and rising raw material costs have been hurting the profit margins of the industry participants. Supply-chain constraints remain a key issue, resulting in inefficiencies and larger inventory. Operating expenses of companies are rising thanks to pandemic-related business challenges and sharp rises in variable operating expenses, including company-wide, performance-based compensation, excessive logistics and freight costs. Meanwhile, the industry is also susceptible to stringent governmental regulations on energy efficiency and gas emissions. HVAC systems use refrigerants for cooling, which is harmful to humans and the environment. Also, stiff competition and the impact of seasonality on the industry’s revenues are significant risks.

Zacks Industry Rank Indicates Bright Prospects

The Zacks Building Products - Air Conditioner & Heating industry is a six-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #39, which places it in the top 16% of more than 250 Zacks industries.

The group’s Zacks Industry Rank, which is basically the average of the Zacks Rank of all the member stocks, indicates impressive near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperform the bottom 50% by a factor of more than 2 to 1.

Before we present a few stocks that you may want to consider for your portfolio, let’s take a look at the industry’s recent stock-market performance and valuation picture.

Industry Outperforms S&P 500, Sector

The Zacks Air Conditioner & Heating industry has outperformed the broader Zacks Construction sector and Zacks S&P 500 composite over the past year.

Over this period, the industry has lost 12.1% versus the broader sector’s 17.4% decline. Meanwhile, the Zacks S&P 500 composite has slipped 15.1% during the period.

One-Year Price Performance

Industry's Current Valuation

On the basis of the forward 12-month price to earnings, which is a commonly used multiple for valuing Air Conditioner and Heating stocks, the industry is currently trading at 24.8X versus the S&P 500’s 17.9X and the sector’s 13.4X.

Over the past five years, the industry has traded as high as 39.9X, as low as 19.4X and at a median of 24.3X, as the chart below shows.

Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500

2 Air Conditioner and Heating Stocks to Buy

Below, we have discussed two stocks from the Zacks Air Conditioner & Heating universe that have solid growth potential. The chosen companies currently carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Comfort Systems USA, Inc.: Based in Houston, TX, this company is a national provider of comprehensive heating, ventilation and air conditioning installation along with maintenance, repair and replacement services. A solid backlog level and substantial ongoing investments in training, productivity and technology are expected to drive growth. Overall positive trends — primarily in industrial, technology, and manufacturing markets served by the company — as well as accretive buyouts are encouraging. The acquisitions have expanded its scale, increased recurring service revenues, and enhanced expertise in complex markets, including industrial, technology and life sciences.

Comfort Systems, which currently carries a Zacks Rank #2, has gained 28.8% over the past year. The company is expected to witness 17.7% earnings growth in 2023.

Price and Consensus: FIX

AAON, Inc.: Based in Tulsa, OK, AAON engineers, manufactures and markets air conditioning as well as heating equipment. The company maintains a balance between new construction and replacement applications and is making the most of robust replacement demand, broadly across the non-residential building market. Despite inflationary cost pressures, the BasX acquisition, which was closed in December 2021, has been delivering solid results for AAON. While supply-chain issues and inflation caused similar issues, BasX has been flexible in adapting to challenges.

AAON, which currently carries a Zacks Rank #2, has gained 1.3% over the past year. Earnings are expected to grow 50% in 2023.

Price and Consensus: AAON