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2 Stocks to Buy From the Thriving Air Conditioner & Heating Industry

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The Zacks Building Products - Air Conditioner & Heating industry stands at a strategic vantage point to leverage the prevailing mega-trends and opportunities tied to the energy transition and the burgeoning pro-environmental movement. As we progress into 2024 and beyond, companies within this industry are witnessing a surge in demand for renewable energy solutions, presenting lucrative avenues for expansion. Despite grappling with inflationary pressures, key players such as Comfort Systems USA, Inc. (FIX - Free Report) and The AZEK Company Inc. (AZEK - Free Report) are thriving by offering essential maintenance, monitoring, and repair services, all while implementing judicious cost-control measures. Moreover, the residential sector's uptick and the push to replace outdated systems for enhanced energy efficiency and reduced carbon emissions, alongside planned investments in cutting-edge technologies, are propelling industry participants forward with considerable momentum.

Industry Description

The Zacks Building Products - Air Conditioner & Heating industry comprises designers, manufacturers, and marketers of a broad range of products for 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 the Air Conditioner & Heating Industry

U.S. Administration’s Pro-Environmental Moves: Reducing greenhouse gas emissions for a cleaner environmental footprint has been a major focus of the U.S. administration. Many industry participants remain engaged in supporting industries and facilities by selling and maintaining clean and efficient energy systems to reach their environmental goals for carbon reduction while providing resiliency to grid outages. The companies are gaining from the fast-growing controlled-environment agriculture industry, courtesy of their consistent supply of clean cooling solutions. Overall, the companies are well-positioned to gain from the renewable energy drive of the pro-environmental U.S. administration. Meanwhile, the companies have been benefiting from an improvement in the residential and non-residential market, along with a rise in repair and remodeling activities.

Technology Augmentation & Inorganic Moves: Persistent investments in technologies designed to revolutionize customer experience seem 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 in the expansion of distribution, research and development projects, and marketing programs are contributing significantly to the companies’ top lines. The players are also actively pursuing accretive acquisitions to broaden their product portfolios and expand their geographic footprints, as well as market share. Meanwhile, services associated with maintaining, monitoring and repairing the existing equipment are providing industry participants with stable revenue sources. The industry generates a major share of revenues from these services, which consumers generally cannot suspend, even when the construction market fluctuates.

Rising Costs, Regulations: Although supply-chain issues have somewhat eased in recent times, the same, along with rising raw material costs, have been causes of concern, hurting the profit margins of industry participants. Operating expenses of companies are rising due to the sharp rises in variable operating expenses, including company-wide, performance-based compensation, and excessive logistics and freight costs. Meanwhile, the industry is susceptible to stringent governmental regulations on energy efficiency and gas emissions. HVAC systems use refrigerants for cooling, which is harmful to humans and the environment. Also, stiff competition and the impacts of seasonality on the industry’s revenues are significant risks.

Zacks Industry Rank Indicates Bright 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 #13, which places it in the top 5% 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 outperform 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 a higher 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 January 2024, the industry’s earnings estimates for 2024 have increased to $5.93 from $5.76 per share.

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.

In the same time frame, the industry has gained 69.2% compared with the broader sector’s 57.9% rise. Meanwhile, the Zacks S&P 500 Composite has gained 27.1% during the period.

One-Year Price Performance

Industry's Current Valuation

On the basis of the 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 33.3X versus the S&P 500’s 21.2X and the sector’s 18.4.

Over the past five years, the industry has traded as high as 40.2X, as low as 17.3X and at a median of 28.2X, as the chart below shows.

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

2 Air Conditioner and Heating Stocks to Buy Now

Below, we have discussed two stocks from the Zacks Air Conditioner & Heating universe with solid growth potential. The chosen companies currently carry a Zacks Rank #1 (Strong Buy) or 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Comfort Systems: Based in Houston, TX, the company is a national provider of comprehensive heating, ventilation and air conditioning installation, along with maintenance, repair and replacement services. The company’s mechanical operations and electrical segment have been performing well, benefiting from continued growth and solid performance in its modular business. A solid backlog level and substantial ongoing investments in training, productivity and technology are expected to drive growth. The acquisitions have expanded its scale, increased recurring service revenues, and enhanced expertise in complex markets, including industrial, technology and life sciences.

FIX currently sports a Zacks Rank #1, which has gained 146.7% over the past year. The company is expected to witness 30.7% earnings growth in 2024. FIX surpassed earnings estimates in all the trailing four quarters, with the average surprise being 25.5%. It carries an impressive VGM Score of B, making it a potentially interesting investment opportunity.

Price and Consensus: FIX

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 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. The company has been experiencing ongoing success by effectively implementing strategies for growth and productivity, achieving strong operational performance, and achieving double-digit growth in residential sales. Their primary focus is on expanding their business through the introduction of new products, converting materials, and expanding their customer base. In addition, they are working to increase profit margins by excelling in operations, saving on sourcing costs, and implementing recycling initiatives.

AZEK stock — currently carrying a Zacks Rank #2 — has gained 109.8% over the past year. AZEK has seen an upward estimate revision of 19.8% for fiscal 2024 earnings over the past 60 days to $1.15 per share. The estimated figure indicates 55.4% year-over-year growth. AZEK surpassed earnings estimates in all the trailing four quarters, with the average surprise being 41%.

Price and Consensus: AZEK

See More Zacks Research for These Tickers

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Comfort Systems USA, Inc. (FIX) - free report >>

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