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4 Air Conditioner & Heating Stocks to Watch in a Prospering 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 technologies — should lend support to Lennox International, Inc. (LII - Free Report) , The AZEK Company Inc. (AZEK - 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. The solid momentum of the U.S. housing market, backed by the 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 substantial 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 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 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, Competition: Rising raw material costs due to 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 refrigerants for cooling that is harmful to humans and the environment. Most importantly, supply chain disruptions due to the impact of the coronavirus pandemic across the United States are 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 #71, which places it in the top 28% 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 2022 have increased 7.2%.

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 gained 43.2% compared with the broader sector’s 26.7% rise. Meanwhile, the Zacks S&P 500 composite has risen 28.9% 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 33.5X versus the S&P 500’s 22.7X and the sector’s 16.3X.

Over the past five years, the industry has traded as high as 39.9X, as low as 19.4X and at a median of 24.6X, 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 selected two stocks in the Zacks Air Conditioner & Heating universe that currently carry a Zacks Rank #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 (Strong Buy) stocks here.

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.

AAON, which currently flaunts a Zacks Rank #2, has gained 14.6% over the past year. Further, AAON has seen a 7.9% upward estimate revision for 2022 earnings over the past 60 days. Earnings are expected to grow 31.2% for 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. 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 enhanced its scale, increased recurring service revenues, and lifted expertise in complex markets including industrial, technology and life sciences.

Comfort Systems, which currently carries a Zacks Rank #2, has gained 74% over the past year. The company is expected to witness 14.6% earnings growth for 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 a 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. Residential, and Commercial and Refrigeration continue to rebound and benefit from the pent-up demand created last year.

Zacks Rank #3 Lennox’s earnings are expected to grow 13.7% for 2022. It has gained 15.3% over the past year. Lennox has seen a 0.8% upward estimate revision for 2022 earnings over the past 30 days.

Price and Consensus: LII

The AZEK Company: Headquartered in Chicago, IL, this company manufactures low-maintenance and environmentally-sustainable outdoor living products — including TimberTech decking and Versatex and AZEK Trim — for residential, commercial, and industrial markets. Strong end-market demand is being driven by repair & remodel market strength, sustained interest in outdoor living, and an accelerated trend in material conversion to the company’s various long-lasting, high-performance products. AZEK is also progressing well in the decking capacity expansion program. Its multi-phase expansion 2 program is expected to expand decking capacity by more than 100%, versus a 2019 baseline, by the end of 2022. Growth via innovation, margin expansion through recycle and continuous improvement programs also bode well.

Zacks #3 Ranked AZEK’s earnings are expected to grow 19.4% this year. This company has gained 18.5% over the past year.

Price and Consensus: AZEK