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 is sold to 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 housing market, which has borne the brunt of rising interests/mortgage rates and higher raw material costs since the end of 2017, has regained its momentum, buoyed by a declining mortgage rates trend. The industry players are expected to reap the benefits of solid household formation attributable to declining mortgage/interest rates, steady economic growth and favorable demographics. This apart, spurred-up demand courtesy of a rise in disposable and per capita income, and a lower unemployment rate cannot be ignored. Higher construction spending activity in non-residential, commercial and industrial sectors is a boon to the Air Conditioner & Heating industry, boosting companies’ revenues and profits.
- Along with accelerated construction spending in the United States, continued investments in technologies designed to revolutionize customer-experience seem to be vital growth catalysts to 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 its 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, rising freight expenses, stiff competition and the impact of seasonality on the industry’s revenues pose significant risks to the forthcoming quarters. The industry is also susceptible to heavy governmental regulation on energy efficiency and gas emission. HVAC systems use refrigerant for cooling that is harmful to humans and the environment.
Zacks Industry Rank Indicates Dull Outlook
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 #213, which places it at the bottom 19% 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 dismal 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 bottom 50% of the Zacks-ranked industries is a result of negative earnings outlook for the constituent companies in aggregate. Looking at the aggregate earnings estimate revisions, it appears that analysts are gradually losing confidence in this group’s earnings growth potential. Since June 2019, the industry’s earnings estimate for the current year and 2020 has gone down 8.1% and 7.1%, respectively.
Despite the dull scenario, we will present a few stocks that can be bought or retained, considering their robust growth endeavors. Prior to that, let’s take a look at the industry’s shareholder returns and current valuation.
Industry Underperforms S&P 500 and Sector
The Zacks Air Conditioner & Heating industry has underperformed the broader Zacks Construction sector as well as the Zacks S&P 500 composite over the past year.
The industry has gained 5.4% over this period compared with the S&P 500’s increase of 13.1%. The broader sector has also gained 23.5% 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 22.9X versus the S&P 500’s 17.9X and the sector’s 15.1X.
Over the past five years, the industry has traded as high as 27.6X, as low as 15.6X and at the median of 23.4X, as the chart below shows.
Industry’s P/E Ratio (Forward 12-Month) Versus S&P 500
A major boost in residential market along with infrastructural and construction spending should continue to favor the industry’s performance. Additionally, maintaining, monitoring and repairing services along with prudent cost-management practices leveraging technology should lend support. However, the aforementioned growth factors seem to be weighed down by headwinds arising from rising costs, heavy governmental regulation and competitive pressure.
Below we present only one stock from the Zacks Air Conditioner & Heating space that carries a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
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 an expected earnings growth of 15.2% for 2020. Its EPS estimates for 2020 have witnessed upward revision of 6.1% to $3.33 in the past 30 days.
Price and Consensus: FIX
Investors might prefer holding on to the following stocks with impressive prospects.
Tecogen Inc. (TGEN - Free Report) : Headquartered in Waltham, MA, this company designs, manufactures and sells industrial and commercial cogeneration systems that produce combinations of electricity, hot water and air conditioning. This stock carries a Zacks Rank #3 (Hold) and has an expected earnings growth of 253.9% for 2020.
Price and Consensus: TGEN
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. The consensus earnings per share estimate for this Zacks Rank #3 stock has moved 1.9% north for 2020, over the last 30 days. It has an expected earnings growth of 7.2% for 2020.
Price and Consensus: WSO
Below are two stocks with a bearish Zacks Rank that we would recommend investors to stay away from for the time being.
AAON, Inc. (AAON - Free Report) : This Tulsa, OK-based manufacturer of air-conditioning and heating equipment carries a Zacks Rank #5 (Strong Sell). The consensus earnings per share estimate has moved 14% south for 2020, over the last 30 days.
Price and Consensus: AAON
Lennox International Inc. (LII - Free Report) : This Richardson, TX-based provider of climate control solutions on an international scale also has a Zacks Rank #5. The consensus earnings per share estimate has moved 3.5% south for 2020, over the last 30 days.
Price and Consensus: LII