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4 Stocks to Gain From Promising Air Conditioner & Heating Industry

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A major boost in the 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 — which have been leveraging technology — should lend support to Lennox International, Inc. (LII - Free Report) , Watsco, Inc. (WSO - Free Report) , AAON, Inc. (AAON - Free Report) as well as Comfort Systems USA, Inc. (FIX - 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) as well as 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 historically low mortgage rates, is expected to be a major tailwind for the industry participants. Also, the industry stands to benefit from a solid rise in repair and remodeling activities.

Technology Augmentation & Inorganic Moves: Persistent 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 strong momentum. Importantly, new investments for 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 as well as market share. Meanwhile, services associated with maintaining, monitoring and repairing the existing equipment are also providing the industry participants with a stable source of revenues. The industry generates a major share of revenues from these services, which consumers generally cannot suspend even when the construction market fluctuates.

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 regulations on energy efficiency and gas emissions. HVAC systems use refrigerant for cooling that is harmful to humans and the environment. Most importantly, supply chain disruption due to the impact of the coronavirus pandemic 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 2021, the industry’s earnings estimates for 2021 have gone up 5.9%.

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 Zacks S&P 500 composite over the past year.

Over this period, the industry has gained 17% compared with the broader sector’s 37% rise. Meanwhile, the Zacks S&P 500 composite has risen 34.1% 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 32.5X versus the S&P 500’s 21.6X and the sector’s 15.3X.

Over the past five years, the industry has traded as high as 39.9X, as low as 19.4X and at a median of 32.5X, as the chart below shows.

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

4 Air Conditioner and Heating Stocks to Watch

We have two stocks in the Zacks Air Conditioner & Heating universe that currently sport a Zacks Rank #1 (Strong Buy) and 2 (Buy). We have also highlighted 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 along with related parts in the United States, Canada, Mexico and Puerto Rico. The company has been benefiting from an improvement in the e-commerce business. Also, increased focus on accretive acquisitions and enhancing shareholder value bodes well. Markedly, it has been adjusting business per the needs of customers, reducing costs in coronavirus-affected markets and improving efficiency.

This Zacks Rank #2 company’s earnings are expected to grow 39.5% in 2021. This company has gained 21.8% year to date compared with the industry’s 17.7% rally. Watsco has seen upward estimate revision for 2021 and 2022 earnings by 11.3% and 12.4%, respectively, over the past 30 days.

Price and Consensus: WSO

AAON, Inc.: Based in 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 nonresidential building market. Overall, higher revenues, improved productivity, lower SG&A expenses (as a percentage of sales) along with a lower tax rate bode well for AAON despite inflationary cost pressures.

This Zacks Rank #2 company’s shares have has gained 4% year to date. That said, AAON has seen upward estimate revision for 2021 and 2022 earnings by 7.6% and 8.6%, respectively, over the past seven days. Earnings are expected to grow 7.8% in 2022.

Price and Consensus: AAON

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. Although it is expected to experience modest headwinds in same-store revenues in 2021 due to delays in project bookings and starts (particularly during first-half 2021), the stock has upside potential backed by strong ongoing bidding activity. Overall positive trends — primarily in industrial, technology and manufacturing markets served by the company — as well as accretive buyouts are encouraging.

This Zacks Rank #3 company has gained 46.3% year to date. Although the company is expected to witness tepid earnings in 2021, the metric is expected to grow 9.8% in 2022.

Price and Consensus: FIX

Lennox International: Headquartered in Richardson, TX, this company is a provider of climate control solutions on an international scale. It has been benefiting from strong residential market and registering solid growth across all three businesses. The Residential business is registering higher revenues, margin, and profit on strong growth in both replacement and new construction business. The Commercial business is also doing well, given higher revenues and margins. The momentum persists in second-half 2021 for Residential, and Commercial and Refrigeration, which continue to rebound and benefit from the pent-up demand created last year.

This Zacks Rank #3 company’s earnings are expected to grow 32.3% for 2021. It has gained 24.5% year to date. Lennox has seen upward estimate revision for 2021 and 2022 earnings by 5.4% and 4.1%, respectively, over the past 30 days.

Price and Consensus: LII