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3 Stocks Worth a Look From the Resilient Air Conditioner & Heating Industry

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A major boost in residential market should continue to drive the Zacks Building Products - Air Conditioner & Heating industry. Additionally, maintaining, monitoring and repairing services along with prudent cost-management practices leveraging technology should lend support to Watsco, Inc. (WSO - Free Report) , Lennox International, Inc. (LII - Free Report) and AAON, Inc. (AAON - Free Report) .

Industry Description

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.

3 Trends Shaping the Future of Air Conditioner & Heating Industry

Solid Residential Market: The industry participants have been gaining strength from an uptick in demand. Solid momentum of the U.S. housing market, backed by rising need for more work-at-home space and record-low mortgage rates, is expected to be a major tailwind for industry participants. Also, the industry stands to benefit from the strong rise in repair and remodeling activity.

Technology Augmentation & Inorganic Moves: 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.

Rising Costs, Tariffs, Competition: 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 across the United States is a major headwind.

Zacks Industry Rank Indicates Bullish 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 #99, which places it in the top 39% 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 June 2020, the industry’s earnings estimates for 2020 have gone up 18.4%. For 2021, the industry’s earnings estimates have increased 12.1% 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 Lags S&P 500, Sector

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

Over this period, the industry has lost 13% against the broader sector’s 19.5% rise. Meanwhile, the Zacks S&P 500 composite has risen 17.3% during the period.

One-Year Price Performance


 
 

Industry’s Current Valuation

On the basis of 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 35.8X versus the S&P 500’s 22.7X and the sector’s 17.2X.

Over the past five years, the industry has traded as high as 39.9X, 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


 
 
 

3 Air Conditioner and Heating Stocks to Watch

We have one stock in the Zacks Air Conditioner & Heating universe that currently sports a Zacks Rank #1 (Strong Buy) We also highlight two stocks with a Zacks Rank #3 (Hold) from the same industry that have solid prospects. You can see the complete list of today’s Zacks #1 Rank stocks here.

Watsco: Headquartered in Miami, FL, Watsco distributes air conditioning, heating, and refrigeration equipment; and related parts in the United States, Canada, Mexico and Puerto Rico. The company has been benefiting from improvement in e-commerce business. Also, increased focus on accretive acquisitions and enhancing shareholder value bode well. Markedly, the company has been adjusting business per the needs of customers, reducing costs in the coronavirus-affected markets and improving efficiency.

This Zacks Rank #1 company’s earnings are expected to grow 4% in 2020. This company has gained    27.4% in the past six months against the industry’s 14.4% decline. Watsco has seen upward estimate revision for 2020 and 2021 bottom line over the past 60 days of 5.8% and 8.1% respectively, depicting analysts’ optimism over the stock’s earnings prospects.

Price and Consensus: WSO

Lennox International: Headquartered in Richardson, TX, this company is a provider of climate control solutions on an international scale. The company has been benefiting from strong residential market. Although unfavorable mix and tariffs have been impacting its gross margins, favorable price, lower material and other product costs, higher factory productivity, lower distribution and freight costs are aiding the same.

Although this Zacks Rank #3 (Hold) company’s earnings are expected to decline 15.2% for 2020 due to COVID-19 related woes, the same is likely to grow 13.7% for 2021. This company has gained 33.5% in the past six months. Lennox has seen upward estimate revision for its respective 2020 and 2021 bottom line over the past 60 days of 10% and 7.6%, depicting analysts’ optimism over the stock’s earnings prospects.

Price and Consensus: LII


AAON: Headquartered in Tulsa, OK, this company is a manufacturer of air-conditioning and heating equipment. Improved sales and improved productivity have been aiding AAON.

This Zacks Rank #3 company has an expected earnings growth rate of 38.2% for 2020. This company has gained 21.5% in the past six months. AAON has seen upward estimate revision for its 2020 bottom line over the past 60 days of 11%, depicting analysts’ optimism over the stock’s earnings prospects.
Price and Consensus: AAON


 

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Lennox International, Inc. (LII) - free report >>

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AAON, Inc. (AAON) - free report >>