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Zacks Investment Research upgraded Lennox International, Inc. (LII - Snapshot Report) to a Zacks Rank #1 (Strong Buy) on Jul 24, based on the company’s impressive second-quarter 2013 results and a strong outlook.

Why the Upgrade?

Lennox reported impressive results for second-quarter 2013 with adjusted earnings per share of $1.31, increasing 33.7% year over year. Revenues in the quarter were $913.1 million, increasing 8.7% year over year, due to better volumes and price/mix.

In the quarter, Lennox experienced a positive momentum in the replacement and new construction business, driving the Residential segment revenues. Commercial segment’s demand in North America was strong, though that in Europe remained soft.

The company’s cost control measures paid off in the quarter, resulting in a 300 basis points (bps) increase in the gross profit margin to 27.8%. Moreover, adjusted income from continuing operations in the quarter reached $66.5 million, increasing 31.4% year over year.

Lennox expects to venture into the emergency replacement markets in the coming quarters. The company is investing in distribution centers, to be able to provide deliveries on the same day or the next. It is expected that the company will have 32 commercial distribution centers by the end of 2013.  

Lennox is well positioned to expand through investments and product launches with a strong balance sheet with cash and cash equivalents of $45.3 million. Moreover, the company remains focused on increasing shareholders’ value. In the reported quarter, Lennox paid a quarterly dividend of 20 cents a share, representing a 20% hike year over year.

Subsequent to the strong second quarter, Lennox upped its guidance for 2013. Core sales in 2013 are now expected to grow by 6% to 8% year over year, against the previously announced 3% to 6%. Moreover, earnings per share for the year are currently expected in the range of $3.45 – $3.75 against $3.25 – $3.55 as expected earlier.

Lennox continues to strengthen its foothold in South America and Asia Pacific, although the European market keeps us cautious.

Other Stocks to Consider

Besides Lennox, other operators in the sector having a favorable Zacks Rank are Watsco Inc. (WSO - Analyst Report), Aegion Corporation (AEGN - Snapshot Report) and Eagle Materials Inc. (EXP - Snapshot Report). All of them currently have a Zacks Rank #2 (Buy).

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