The Zacks Building Products - Air Conditioner & Heating industry comprises designers, manufacturers and marketers of a broad range of products for the 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), and residential new construction markets.
Let’s take a look at the industry’s three major themes:
- The industry participants are likely to experience an uptick in demand, courtesy of a solid housing market scenario backed by declining interest/mortgage rates. Higher construction spending activity in residential, non-residential, commercial and industrial sectors is advantageous for the industry.
- Along with accelerated construction spending in the United States, continued investments in technologies designed to revolutionize customer experience seem to be 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 momentum. Importantly, new investments in the expansion of distribution footprint, research and development projects as well as marketing programs are contributing significantly to the companies’ top lines. The companies are also actively pursuing accretive acquisitions to broaden their product portfolio, and expand geographic footprint and market share. Meanwhile, services associated with maintaining, monitoring and repairing existing equipment are also providing the industry participants a stable source of revenues. Notably, the industry generates a major share of revenues from these services, which consumers generally cannot suspend even when the construction markets fluctuate.
- However, rising raw material costs due to tariffs and trade restrictions have been hurting profit margins to some extent. Also, stiff competition and the impact of seasonality on the industry’s revenues are significant risks. The industry is also susceptible to stringent governmental regulation on energy efficiency and gas emission. HVAC systems use refrigerant for cooling that is harmful to humans and the environment. Most importantly, supply chain disruption due to the coronavirus outbreak in China and across the United States has somewhat marred the industry’s prospects for now.
Zacks Industry Rank Indicates Bullish Prospects
The Zacks Building Products - Air Conditioner & Heating industry is a five-stock group within the broader Zacks Construction sector. The industry currently carries a Zacks Industry Rank #108, which places it at the top 43% 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 bright near-term prospects. Our research shows that the top 50% of the Zacks-ranked industries outperforms the bottom 50% by a factor of more than 2 to 1.
The industry’s positioning in the top 50% of the Zacks-ranked industries is a result of positive earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually gaining confidence in this group’s earnings growth potential. Since May 2020, the industry’s earnings estimates for 2020 have gone up 1.5%. For 2021, the industry’s earnings estimates have increased 1.3% since June 2020.
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 In-Line With S&P 500, Lags Sector
The Zacks Air Conditioner & Heating industry is in line with the Zacks S&P 500 composite but has lagged the broader Zacks Construction sector over the past year.
The industry and the S&P 500 have risen 8.7% over this period. The broader sector has climbed 13.8% in the said time frame.
One-Year Price Performance
Industry’s Current Valuation
On the basis of forward 12-month price-to-earnings ratio, which is a commonly used multiple for valuing Air Conditioner and Heating stocks, the industry is currently trading at 32.8X versus the S&P 500’s 22.8X and the sector’s 19.5X.
Over the past five years, the industry has traded as high as 32.8X, as low as 19.4X and at the median of 24.1X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
Rising costs, stringent governmental regulations and competitive pressure are concerning. Furthermore, the coronavirus-led impact on the industry is noticeable. Nonetheless, a major boost in residential market along with infrastructural and construction spending should continue to drive the industry’s performance. Additionally, maintaining, monitoring and repairing services along with prudent cost-management practices leveraging technology should lend support.
Currently, there is no top-ranked stock in the Zacks universe of air conditioner & heating space despite the bullish industry prospects. Nonetheless, investors may also hold on to the following stocks, which currently carry a Zacks Rank #3 (Hold) and have solid prospects. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Lennox International Inc. (LII - Free Report) : Headquartered in Richardson, TX, this company is a provider of climate control solutions on an international scale. Its earnings estimates have gone up 2.9% over the past 30 days for 2020, reflecting analysts’ optimism over the company’s prospects.
Price and Consensus: LII
Watsco, Inc. (WSO - Free Report) : Headquartered in Miami, FL, Watsco distributes air conditioning, heating, and refrigeration equipment; and related parts in the United States, Canada, Mexico and Puerto Rico. Its earnings estimates have gone up 1.5% over the past 30 days for 2020.
Price and Consensus: WSO
AAON, Inc. (AAON - Free Report) : Headquartered in Tulsa, OK, this company is a manufacturer of air-conditioning and heating equipment. It has an expected earnings growth rate of 28.4% for 2020.
Price and Consensus: AAON
Comfort Systems USA, Inc. (FIX - Free Report) : The Houston, TX-based leading provider of mechanical services — including heating, ventilation, air conditioning, plumbing, piping and controls — has a trailing 12-month return on equity (ROE) of 19.3% compared with the industry’s 14.2%.
Price and Consensus: FIX
Tecogen Inc. (TGEN - Free Report) : Headquartered in Waltham, MA, this company designs, manufactures, sells, and services systems that produce electricity, hot water, and air conditioning for commercial installations and buildings and industrial processes. Earnings for 2021 are expected to grow 127.3%.
Price and Consensus: TGEN